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Homeowners InsuranceA.D.Banker&Company

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Homeowners Insurance

Chapter 1 Introduction to the Homeowners Policy ............................................................ 1Fire Policy; Standard Fire Policy; Package Policies; Pricing; Deductibles; Agent’s Responsibility; Errors and Omissions Coverage; Summary; Review Questions

Chapter 2 Overview of the Homeowners Policy ............................................................... 10Definitions; Eligibility; Insuring Agreement; Perils, Hazards, and Causes of Loss; Basic, Broad, and Open Perils; Review Questions

Chapter 3 Sections I and II Coverages of the Homeowners Policy ................................. 20Section I – Property Coverages; Section II – Liability; Review Questions

Chapter 4 Homeowners Policy Forms ............................................................................... 31HO-1 - Basic Form; HO-2 – Broad Form; HO-3 – Special Form; HO-3 Loss Settlement; HO-5 – Comprehensive Form; HO-8 – Modified Coverage Form; HO-4 – Contents Broad Form; HO-6 – Unit-Owners Form; Homeowners Form Comparison of Typical Perils; Review Questions

Chapter 5 Homeowners Policy Property Coverages ........................................................ 41Additional Coverages; Section I – Property Exclusions; Section I – Conditions; Section I – Property Endorsements; Review Questions

Chapter 6 Liability Coverages E and F .............................................................................. 52Additional Coverages; Section II – Exclusions; Coverage E – Personal Liability Exclusions; Coverage F – Medical Payments to Others Exclusions; Section II – Conditions; Section I and II – Conditions; Business Endorsements; Umbrella Liability Coverage; Review Questions

Chapter 7 Underwriting and Claims ................................................................................... 61Underwriting; Claims; Claims Settlement – Property; Appraisal; Claim Settlement – Liability; Course Summary; Review Questions

Review Questions Answer Key ............................................................................................. 69

Table of Contents

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Copyright 2013© A.D. Banker & Company®, L.L.C.

This course, seminar, or publication provides general information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The publisher hereby expressly excludes all warranties.

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Florida Unauthorized Entities

An entity that is required to be licensed or registered with the Florida Office of Insurance Regulation but is operating without the proper authorization is identified as an unauthorized insurer. All persons have the responsibility of conducting reasonable research to ensure they are not writing policies or placing business with an unauthorized insurer. Any person who, directly or indirectly, aid or represent an unauthorized insurer can lose their licenses or face other disciplinary sanctions.

Please see section 626.901, Florida Statutes, to read the laws. Lack of careful screening can result in significant financial loss to Florida consumers due to unpaid claims and/or theft of premiums. Under Florida law, a person can be charged with a third-degree felony and also held liable for any unpaid claims and refund of premiums when representing an unauthorized insurer. It is the person’s responsibility to give fair and accurate information regarding the companies they represent.

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Chapter 1

Introduction to the Homeowners PolicyIt was 2:00 am when the Johnson family woke up to a loud lightning crack and then a crash. Jack and Marie Johnson raced to check on their two children, 17 year-old Mike and 12 year-old Mary. Everyone was fine but was shocked to find the roof had caved into the fourth unoccupied bedroom and the rain was drizzling into the room. After a quick check on the damage, Jack guessed it was caused by lightning that struck a tree in their backyard which then fell over onto the roof and crashed into the bedroom. He couldn’t tell if the lightning caused a roof fire so he called 911 for assistance from the fire department. The fire department arrived a few minutes later and found that yes, there were live embers in the roofing shingles and after putting out all remaining fire sparks, recommended that Jack leave the house and call his insurance company. Jack’s insurance agent, Tom Goodsense, told Jack to immediately call the 24-hour claims service line.

Homeowners insurance is a very important product for a large market. The homeowners policy is designed to protect the insured’s investment in the home and personal possessions.

Example: Jack and Marie found out that not only would the insurance company pay for their hotel room that night, but also for a damage restoration company to come out immediately to stop further damage by installing a temporary roof and removing the damaged materials. They also set up fans to dry out the water-soaked interior.

About two-thirds of housing units countrywide are owner-occupied and 25% of all property/casualty premiums are homeowners policy premiums. Net written premiums for homeowners exceed $60 billion. While over 90% of homeowners have insurance in place, only about two-thirds of those households have some sort of disaster-preparedness kit or plan. That doesn’t mean, however, that homeowners are adequately insured or prepared for a loss. In fact, almost 70% of homes in the U.S. are underinsured for insurance purposes, yet, for most policyholders, their home is their single most valuable property possession and their largest investment.

The chance that some of Agent Tom Goodsense’s homeowners insurance clients will have a claim is great, and all too often claimants have issues with the claim settlement and how the adjuster determines the coverage. Almost 6% of insureds have a claim each year. Like Jack and Marie, Tom’s clients will look to him for help, both before and after a claim, so it is important for Tom to understand what he is selling the insured and how to minimize potential for present and future conflicts and misunderstandings.

Fire PolicyHomeowners insurance has come a long way! In 1666 the Great Fire of London caused devastation to the city. In response to that devastation, the first insurance offices selling fire insurance were established in London. Fast forwarding to the 1800s in the United States, Jack’s ancestors were able to buy a fire insurance policy that combined the fire policy, the policy conditions, and proposals (later called endorsements). The policy was based on hazard classes which identified the likelihood of fire loss ranging from ‘not hazardous’, such as a building made of brick to ‘extra hazardous’, such as a building made of wood. The hazard classes also identified the type of property or the business conducted in the building ranging from ‘not hazardous’, such as coffee or household furniture to ‘extra hazardous’ such as commercial basket makers or a blacksmith. The cost of insurance was determined by these hazard classes. The difference in cost to the property owner could vary from $0.25 per $100 of insurance for the non-hazardous risk to $.90 per $100 of insurance for the most hazardous risk.

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2 HOmeOwneRS InSURAnce

Standard Fire PolicyBy the early 1900s, however, insurance companies continued the practice of insuring both personal and commercial risks with their own individual fire policies. Lack of uniformity was a concern. Jack’s great-great-grandfather bought his first home in 1919 for his bride and insured it with the first 165 line Standard Fire Policy created in 1918 by a group of insurance experts and the New York legislature mandated it as the only fire policy to be sold. Other states followed New York’s lead, and uniformity was achieved. Over the next several decades, changes were made to update and clarify the standard fire policy.

The Standard Fire Policy included four parts:Part 1 was the Declarations which described the location of the property, the insured amount covered, and the name of the insured.

Part 2 was the Agreements which included the premium and the covered perils of fire, lightning, and removal.

Part 3 was the Conditions which described the circumstances for coverage and the duties of the insured and insurer.

Part 4 was the Exclusions which specified the loss perils that were not covered.

Package PoliciesUp until the mid-20th century, perils needed by the insured were provided by either an endorsement to the policy or through the issuance of a separate policy. But when Jack’s grandfather bought a home in 1957 for his growing family, he was able to insure his new home with a package insurance policy. In this new and innovative policy, developed around the mid-1950s, insurance companies combined coverages into one policy which included the Standard Fire Policy perils plus additional extended perils covering personal property and personal liability. Package or multi-line policies offer fewer coverage gaps and savings in premiums, thus eliminating multiple policies and making things easier for both the agent and the insured.

The parts of the packaged homeowners policy are:Insuring Agreement (AAIS: Agreement)DefinitionsSection I – Property Coverages (AAIS: Perils Insured Against – Coverages A,B,C,and D)

Coverage A – Dwelling Coverage B – Other Structures Coverage C – Personal PropertyCoverage D – Loss of Use

Section I – Perils Insured AgainstSection I – ExclusionsSection I – ConditionsSection II – Liability Coverages

Coverage E – Personal LiabilityCoverage F – Medical Payments to Others

Section II – ExclusionsSection II – Additional CoveragesSection II – ConditionsSections I and II - ConditionsEndorsements

A.D. Banker&company©

3ChAPTEr 1: INTrODUCTION TO ThE hOMEOwNErS POLICY

Most losses under the homeowners policy arise from loss to property. Approximately 95% of all incurred homeowners losses are property losses. While liability coverage is provided under the homeowners policy, homeowners coverage is a Property line. Like personal auto insurance, homeowners insurance is a personal lines product.

PricingLike those insurance experts in the 1600s, today’s insurance companies also have pricing strategies. Today, insurance companies calculate premiums using similar components for all property and casualty lines. They do not just “pull the premiums out of the air.” While the actual amounts allocated to each component vary by line of business, these amounts are based on actuarial analysis and assumptions along with historical data. Agents need to understand the basics of insurance pricing in order to be able to explain premium changes to their insureds.

The homeowners policy is a contractual financial agreement designed to redistribute actual and potential losses by spreading the risk among all insureds called an “insurance pool.” The pool maintains economic balance through actuarial analysis and ratemaking and assigns premiums based on the expected losses of the insureds in the pool. The larger the number of insureds independently exposed to a loss, the greater the probability that the actual loss experience will equal the expected loss experience. This principle is called the “ Law of Large Numbers.” This principle of actuarial science has seen numerous challenges, especially when natural disasters cause enormous losses in all lines of insurance. But, with sound statistical analysis, appropriate use of reinsurance opportunities, and sound fiscal management, the industry has been able to maintain a sound insurance infrastructure.

Homeowners insurance is based on the principal of “indemnity,” intending to return the home and possessions to the same condition they were in prior to a loss. There is to be no gain from a loss. In order to stay in business the insurance company must be successful in estimating the expected loss on a large scale and pricing the risks accordingly.

Following is a hypothetical chart representative of what the industry may target on an average basis. It demonstrates the allocation process using average amounts:



how does the insurance company determine its profitability? In this example, a company looks at the prior year and determines the net earned premium:

Net premiums earned ($000) = $59,721,095

The company considers the components of underwriting as a percent of the earned premium. The dollars spent last year on the actual loss and the expenses for adjusting those claims determines the loss and loss adjustment expenses:

Incurred loss and loss adjustment expenses 62.0%

Total Loss and loss adjustment expenses 62.0%

Other expenses must be included. For example, commissions paid to agents and brokerage expenses must be considered. Other underwriting expenses, such as the cost of evaluating a new business application, are also included when determining the total expense of underwriting:

Commissions and brokerage expenses incurred 13.0%

Other underwriting expenses incurred 15.0%

Taxes 5.0%

Total underwriting expenses incurred 33.0%

Finally the dividends paid to policyholders and investment gains on income are included with the grand total of 104%:

Dividends to policyholders 9.0%

The percent of all the expenses adds up to 107% of the earned premium. In dollars, the net earned premium for last year was $59,721,095, but the expenses cost 104% of that, or $62,109,939.

Combined ratio after dividends 104.0%

Note that there was an underwriting loss of $2,388,844 as the combined ratio after dividends exceeds 100%. For every $1.00 received in earned premium, $1.04 was paid in losses and expenses. This company is not recognizing a profit and may need to consider raising premiums.

The “frequency,” or number of property damage claims per 100 policies, is 96% of all of the homeowners losses. The “severity,” or amount of property damage costs of incurred claims per accident year excluding loss adjustment expenses, is less than 65%. While there are more property damage claims, the liability claims excluding loss adjustment expenses are more expensive.

DeductiblesTo help meet a company’s actuarial goals and reduce the premium, insurers use deductibles as a tool to reduce the severity of losses. A deductible means that portion of the insured loss paid by the insured or reduced by the insurer in the final claims settlement. Deductibles only apply to the property section of the homeowners policy. These deductibles will vary by company and also depend on underwriting criteria. One deductible amount is chosen by the insurer or by the rating organization (e.g., ISO or AAIS) as the “base” deductible, and other deductibles are typically calculated as a surcharge or credit amount applied to the base deductible. Over the years, the base deductibles used by the various companies have risen as overall costs and inflation have risen.



While the actual base amounts and the credits and surcharges will vary by state, insurers, or both, the following is an example of how this system works. With all deductibles, the higher the deductible, the lower the premium.

In the following example, which use examples and not actual amounts, the base deductible is $500. Note how each deductible Premium Factor can affect the pricing of this homeowners policy:

Deductible Options, Premium Adjustment Percentages, and Premium Amounts (HO-2, HO-3, HO-4, HO-5, HO-6, HO-8)

Deductible Amount $ Type of Deductible Premium Factor Premium(1)

50 All Perils 1.60 $160.00100 All Perils 1.47 $147.00250 All Perils 1.12 $112.00500(2) All Perils 0.00 $100.001,000 All Perils .84 $84.002,500 All Perils .69 $69.005,000 All Perils .62 $62.00250 All Perils except $500 Wind/Hail 1.06 $106.00250 All Perils except $1,000 Wind/Hail .97 $97.00250 All Perils except $2,500 Wind/Hail .76 $76.00500 All Perils except $1,000 Wind/Hail .88 $88.00500 All Perils except $2,500 Wind/Hail .75 $75.001,000 All Perils except $2,500 Wind/Hail .69 $69.00

(1) Based on hypothetical premium of $100 before the deductible is applied. (2) Base Premium

A more recent development in terms of deductibles is the ‘vanishing deductible.’ There are a variety of twists on this concept, but in general, each year the insured does not have a claim, the deductible amount is reduced to some extent.

The agent must be well versed regarding the available options as these can be a valuable marketing tool that allows homeowners to better manage premiums and risk. The agent should be aware of the widening ranges of deductible options provided by insurers; it is not uncommon for deductibles of $2,500 or $5,000 to be chosen by educated insureds, especially on higher valued dwellings.

The agent must also be willing to help the insured understand the computations and advantages gained by opting for various deductibles. Insureds who do not understand the relationship of deductibles to premiums may get confused and lose confidence in the agent and insurer, or both, with respect to their insurance needs. It is important for deductible changes to be appropriately communicated to the insured so that there are no surprises at the time of a claim.

Agent’s Responsibilitywhat is the agent’s responsibility in all of this? Tom Goodsense, Jack’s insurance agent, was familiar with the claims process and appropriately urged Jack to call the insurance company’s 24-hour claims service line. But understanding the claims process is not the only thing Tom must know. It is critical for Tom to make sure there is adequate, appropriate, realistic, and understood coverage in Jack’s policy as well as each client’s homeowners policy in his book of business. The key to developing and retaining loyal clients and building a strong customer base lies in the quality of informed service concerning homeowners insurance as well as all other lines or products.



With homeowners insurance there is a wide array of high-dollar risks involved with property ownership. Tom’s approach must be to knowledgeably present to each “new client” a risk and coverage analysis and policy quote as well as to each of his renewal clients. Tailoring a policy to meet each client’s risk needs is a vital part of providing good service and building a lasting relationship, since shopping the Internet for insurance is a reality.

The professional agent must be familiar with insurance information from the State, the insurer, and the insured. State variances, regulations, and territory differences must be familiar to the agent. The agent must be educated about the insurer’s policies, procedures, underwriting rules, and options. Finally, the agent must be tuned into the individual needs and risks of the insured client. how can Tom meet all these expectations? He must:

• Be willing to “dig” to access necessary underwriting information

• Know how to ask the right questions

• Be prepared to answer all questions, and do so correctly

• Continually educate himself and the client or insured

• Have a strong working knowledge of:

◦ Underwriting rules ◦ State regulations (including what is required to renew an insurance license) ◦ Company policy forms ◦ rating strategies (including use of deductibles) ◦ Customer checklists ◦ Sample form letters ◦ Presentation aids ◦ Numerous other tools ◦ The competition

Errors and Omissions CoverageTom and his fellow agents understand how important it is to meet these expectations. But what happens if something goes wrong? what happens if an agent makes an error when submitting a homeowners application? Just like Jack’s need for coverage to protect his home, Tom needs coverage to protect his business and work product. Tom needs Errors and Omissions (E&O) Coverage and should contact an insurance broker or agent who specializes in professional liability insurance. This policy will protect him from claims, even baseless claims, for professional negligence. E&O coverage also covers the court costs and any judgments up to the policy amount.

Because agents need to give special attention to risk management that will help prevent errors and omissions allegations, Tom is adding to his list of “must do’s.” He must also be aware of proper procedures for essential agency operational areas such as:

• General and ethical representations

• Binders, orders, or both

• Expirations

• Policy endorsements, renewals, cancellations, and exclusions

• Office procedures and management



SummaryThe homeowners policy provides financial protection for the named insured against various perils and disasters as described in the policy. Most policies contain features that allow the insured and agent to custom design acceptable coverage for each need or risk. The hO-3 form, or some version of it, is generally the most popular policy form in use today. It is estimated that over 84% of the hO policies in the United States are written on the hO-3 form. This course material is based on the hO 00 03 (05 11) policy form created by the Insurance Services Office, or ISO (1), and the hO 0003 (09 08) created by the American Association of Insurance Services, or AAIS (2)

(1) http://www.iso.com – ISO is a leading source of information about personal and commercial lines property and casualty insurance risk.

(2) http://www.aaisonline.com – AAIS is a national advisory organization that develops policy forms and rating information used by property/casualty insurers.

Please note the following:

• This course is intended to be a summary of important concepts and parts of the homeowners programs.

• where possible, the important AAIS deviations from the standard ISO will be noted in italics.

• Individual insurance companies often use their own forms, or ISO or AAIS forms with individualized company enhancements.

• The insurance agent must be educated about the individual policies, forms, and endorsements of the insurance companies that are represented and with those of the carriers with which he or she competes.


Chapter 1 Review Questions

1. Immediately following a covered loss, an insurance company will pay for all of the following, EXCEPT:a. A hotel room for the nightb. Temporary roof repairsc. 5% of the total damaged. Company to dry out water damage

2. The 165 line Standard Fire Policy had each of the following parts, EXCEPT:a. Declarationsb. Exclusionsc. Conditionsd. Endorsements

3. which of the following losses is the most common loss claimed under a homeowners policy?a. Liabilityb. Propertyc. Lost wagesd. Personal property

4. The actual premium of an insurance policy can vary by line of business and is not based on which of the following?a. Stock market trendsb. Actuarial analysisc. Statistical assumptionsd. Historical data

5. which of the following is designed to redistribute actual and potential losses by spreading the risk?a. Actuarial distributionb. Insurance poolc. Underwriting loss ratiod. Insurance contract

6. The more insureds there are in a group, the greater the likelihood is that the insurance company can predict the loss experience. This principle is called the:a. Law of Actuarial Integrityb. Insurance Relativityc. Law of Large Numbersd. Principle of Indemnity

7. Homeowners insurance is intended to put a person back in the same position he was prior to a loss. which of the following does this describe?a. Law of Actuarial Integrityb. Insurance Relativityc. Law of Large Numbersd. Principle of Indemnity

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8. which of the following calculations calculate frequency?a. Claims per 100 policiesb. Claims times the severityc. Claims per 1,000 policiesd. Severity divided by the number of claims

9. which of the following is the premium factor of the base deductible?a. $100b. $1,000c. $0d. $50

10. A homeowners insurance agent must be able to do all of the following, EXCEPT:a. Know how to ask the right questionsb. Be aware of the state insurance regulationsc. Know the competitiond. Assist the claims representative

11. which of the following does an agent need for protection from a lawsuit filed by an angry client for negligence in selling an insurance policy?a. Professional Liability endorsement to the homeowners policyb. Homeowner Agent Protectionc. Agent Liability Coveraged. Errors and Omissions Coverage

12. The essential agency operational areas include all of the following, EXCEPT:a. Ethical representationsb. Expirationsc. Exclusionsc. Eligibility

ChAPTEr 1 rEvIEw QUESTIONS


Chapter 2

Overview of the Homeowners PolicyDefinitionsThere are important terms that must be defined in order to understand their meaning and importance to homeowners insurance. The following words are found in the Definitions section of the policy. As is the case with most insurance policies, there are numerous words defined in the policy in order to clarify coverage.

Named InsuredThe homeowners policy defines the “named insured” as that person shown on the Declarations page. The spouse of the named insured, if a resident in the same household, is also a “named insured.”

Example: John and Marie are married and live together in a home they purchased ten years ago and insure the home with A+ Insurance. While John is listed as the only Named Insured on the policy, Marie is also a named insured, with all the named insured policy rights, because she is a resident spouse. Bill lives next door to John and also insures his home with A+ on which he is the Named Insured. Bill and Julie, his wife, co-own the home. Bill and Julie are separated and Julie moved out a month ago. Is Julie a named insured on the policy?

Answer: Although Julie is still married to John and on the title to the home, she is no longer a named insured since she no longer resides in the insured home.

InsuredThe homeowners policy specifically defines the meaning of “insured” to include the following:

• The named insured.

• Relatives residing in the same household as the named insured are also covered, such as children or caretakers.

• Considered ‘insureds” are children under age 24 of the named insured who are temporarily away from home attending college and still considered a dependent of the named insured. This also includes children under the age of 21 in the care of the named insured or household resident relative temporarily at school.

• Other persons under the age of 21 and in the care of the named insured or resident relative are also covered under the policy. Examples could be foster children, foreign exchange students, or wards of the court.

• Persons responsible for the named insured’s animals or watercraft would be covered unless they are in the business of doing so or are doing so without the named insured’s consent.

• Anyone hired by the named insured to operate a covered vehicle for the maintenance of the premises and who does so with the named insured’s consent would be an insured under the policy.

Example: Harry and Mary own an insured home in Ohio. Their 21-year-old son, Barry, is a freshman at college in New York. For the two years prior to attending college in New York, Barry supported himself working in New York where he shared an apartment with several others. He still works part-

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11ChAPTEr 2: OvErvIEw OF ThE hOMEOwNErS POLICY

time to support himself. Last night, Barry found that a number of items including his laptop and TV were missing from his apartment, and he reported the theft to the police. The next day Harry calls his agent, to report the loss. Will Barry’s stolen items be covered under Harry’s policy?

Answer: Barry is not an insured under the policy as he is no longer a dependent of Harry and Mary. He is supporting himself and moved out of his parent’s home prior to attending college.

Insured Location Insured location is defined in the homeowners policy as the residence premises shown in the Declarations. This includes other premises used in connection with a covered premise, other structures and grounds used by the named insured as a residence shown on the Declaration or acquired during the policy period by the named insured to be used as a residence.

Also included as insured locations are non-owned premises where the insured is temporarily residing, vacant land owned by the insured and not used for farming, land owned by or rented to an insured where a one- to four-family dwelling is being built as a residence, and any part of a premise occasionally rented to an insured for other-than-business use.

Cemetery plots, markers, and vaults are included in most insurers’ provisions up to limits stated in the policy.

Occurrence An occurrence is an accidental, unintended happening. It is also an unintended consequence of an intended cause, including continuous and repeated exposure to substantially the same harmful conditions that result in bodily injury or property damage during the policy period.

Residence Employees Employees of an insured or employees leased to an insured by an agreement with a labor leasing firm, whose duties are related to the maintenance or use of the residence premises or other insured locations, are considered residence employees. These household or domestic employees of the insureds are covered on the residence premises or elsewhere while acting within the scope of their duties as long as those duties do not relate to an off-premises business of the insured.

Example: The insured has a woman clean her house on a weekly basis. The woman uses the insured’s tools and cleaning supplies and cleans under the supervision of the insured. The woman cleans houses for others as well. On her way home from her weekly cleaning for the insured, she stops at the grocery store and on her way out of the store; her phone and her purse containing $150 are stolen. Are the stolen goods covered under the insured’s policy?

Answer: She is on her way home and no longer performing duties for the insured and therefore not considered a residence employee.

Residence PremisesThe residence premise is shown on the Declarations page and is the one-family dwelling in which the named insured resides, or the two-, three-, or four-family dwelling in which the named insured resides in one unit. It includes other structures and grounds at the location of the residence premises, e.g., a free-standing garage or shed on the property where the residence is located. The residence premise is also that part of any other building where the named insured resides.

An unoccupied dwelling is furnished, but not currently inhabited, and not considered vacant. A vacant dwelling doesn’t contain enough personal property to support occupancy as a residence. Some insurers will no longer write coverage for vacant premises.

Example: Jack and Marie owned a vacation home on a lake not far from their home. They spent many weekends enjoying the lake. During that time the vacation home was fully furnished with the



Johnson’s furnishings and some of their clothes. Is this dwelling, while the Johnson’s were back in their primary residence, considered vacant?

Answer: No, it was uninhabited when the family was back in the city, but because it was still furnished, it was not vacant and subject to the vacancy restrictions in the homeowners policy.

Example: Jack and Marie decided to sell the vacation home. They moved everything back to a storage facility in the city. Is the home vacant?

Answer: Yes, since it is now uninhabited and not furnished, it is considered vacant.

There are many other definitions in the policy, both in the Definitions section and throughout other sections as well. remember that a definition in an insurance policy not only defines the meaning of the word, but it also helps explain what is and is not covered.

EligibilityTo qualify for a homeowners policy, other than a tenant or condominium policy, the one- to four-family dwelling must be owner occupied and used for residential purposes. Owner-occupied means that the property or residential premises must be occupied by the named insured who is an owner of the dwelling. A one-family dwelling may not be occupied by more than one additional family or two roomers or boarders. A two-, three-, or four-family dwelling may not be occupied by more than two families, or one family with two roomers or boarders. (The AAIS program allows one- to four-family dwellings used principally for private residential purposes, and each family may be occupied by a maximum of one family with no more than two boarders or roomers, or two families with no boarders or roomers.)

Both programs insure two-, three-, or four-family dwellings in which each co-owner occupies a separate living quarter with a separate entrance. Both interests are covered by insuring co-owner #1 as the named insured with dwelling and dwelling liability coverage on a homeowners policy and coverage on #1’s personal property and personal liability. Co-owner #2 will be listed as an Additional Insured on #1’s homeowners policy giving #2 dwelling and dwelling liability coverage. #2 will be covered for personal property and liability on a tenant homeowners policy.

while obtaining a mortgage is a common method of financing a home, there are other options that will impact the homeowners policy differently. The mortgagee is covered by a mortgage clause. However, it is also possible to purchase a home on a long-term installment or lease basis, or land contract, in which the seller maintains title to the home until the terms are met. The seller’s interest is covered by the Additional Insured endorsement providing dwelling and premises liability coverage. (AAIS rules the approval of this situation is at the option of the company.)

A dwelling under construction that is intended for private residential used by the owner-occupants is eligible for the homeowners policy.

Two situations involving legal ownership are also eligible for coverage under the homeowners policy. The first is the life estate arrangement in which an individual’s interest in the dwelling is limited to the individual’s life.

Example: Under a life estate arrangement Jack left his home to his sister, Jan, for her lifetime. Upon her passing the home will revert to Jack’s children. As soon as she occupies the home, Jan becomes the named insured on the homeowners policy and the owner’s interest is covered by the Additional Insured endorsement.

The second is a property held in trust. ISO lists the trust as the named insured with a trust endorsement and the intended occupant is the trustee who is covered for the “business use” of administering the trust and the bodily injury and property damage arising out of the ownership, maintenance, or use of the residence premises. (AAIS has two additional insured endorsements and limits the liability coverage to incidents arising out of the insured premises.)



Often seasonal or secondary residences may be issued on separate policies dependent on the insurer’s underwriting criteria or due to agent licensing issues. Generally, a seasonal residence located in or out of the same state as the primary residence can be covered by a separate homeowners policy. If within the same state as the primary, and covered by the same insurer, the seasonal home can be covered by just Section I coverage, and extend the Section II liability coverage from the primary. (AAIS covers both the primary and seasonal, if both are within the same state, by endorsing the seasonal onto the primary policy. Otherwise, a separate policy must be issued.)

Incidental farming on the premises is acceptable when insuring a dwelling with a homeowners policy as long as the primary use of the property is residential. Endorsements are available for a farm property away from the residence premises if farming is not the insured’s primary occupation.

An owner of a condominium or cooperative unit is eligible for the hO 00 06 policy (AAIS HO 0006). This policy is primarily used to cover a residence in which no more than one additional family or two boarders or roomers reside. Because the interior of the unit is real property, the policy provides coverage for building property and other structures under Coverage A - Dwelling; no Coverage B is provided. Units held in trust are eligible for coverage.

If the dwelling is rented to a tenant, the insured owner would have to add an endorsement, i.e., ISO’s hO 17 33 (05 11), or purchase a Dwelling Property Policy instead of a homeowners policy, such as:

• Basic Form (DP-1)

• Broad Form (DP-2)

• Special Form (DP-3)

The tenant, however, may obtain a Contents Broad Form policy, hO-4. Like the other homeowners policies, one additional family or two boarders or roomers are allowed. The tenant or renter can occupy an apartment, single family dwelling, or mobile home. Owner-occupants of structures that do not qualify for other homeowner policies can obtain personal property and liability coverage under this policy; however, no building coverage is provided.

The use of the residence premises under any form of coverage must be residential, not commercial or business. Any commercial or business activities on the premises must be incidental and conducted only by the homeowner. The premises must be occupied primarily as a residence. Examples of eligible home-based businesses include professional or business offices and private schools in music, dance, or photography. Home day care operations are not eligible unless endorsed.

The policy must be endorsed to extend liability and property coverage to the incidental occupancy; when endorsed, only premises liability coverage is provided. Any limitation on business personal property under Coverage C is removed. Since a permitted incidental occupancy may be located in the dwelling or a detached structure, endorsements are available to extend coverage accordingly.

Insuring AgreementThe ISO homeowners policy insuring agreement is very simple. The insurance company provides the insurance described in the policy in return for the premium and compliance with all policy provisions.

This agreement is a classic example of a contract of adhesion. The contract is developed by the insurer in its entirety, and the insured must accept it as is.

Perils, Hazards, and Causes of lossA “peril” is the cause of a loss. The homeowners policy may cover “named perils,” which means the specific perils covered by the policy are listed in the policy. Other policies do not specifically define the covered perils and are known as open perils policies, which cover losses caused by any peril except those specifically excluded in the policy. The open perils policy usually generates a higher premium than a named perils policy does and provides correspondingly broader and more extensive coverage.



The open perils policy is the most popular policy. In the ISO homeowners program, the hO-3 provides building coverage on an open perils basis and personal property coverage on a named perils basis.

The policies that define coverage by listing the named perils will sometimes include definitions of the peril. For example, the “aircraft” peril includes coverage for self-propelled missiles and spacecraft.

Other perils are not defined, such as “fire,” “lightning,” or “riot or civil commotion.” So how does an insured determine whether the loss is covered? Common law has long described, and continues to describe, the terms not specifically defined in the policy, such as fire. “Common law” means unwritten law developed primarily from judicial decisions which are based on customs or previous case decisions (i.e. precedent).

Fire is a good example of how common law defines a peril. There are two types of fire: hostile and friendly. “Friendly fire” means a fire that is contained in its intended location. “Hostile fire” means fire that burns somewhere it wasn’t intended to burn.

Example: An example of a friendly fire is a fire within a fireplace. A burning log that accidently rolls out of the fireplace and burns the family room rug is now a hostile fire because it is burning outside its intended boundaries.

A “cause of loss” is also referred to as a peril insured against. While the smoke from agricultural smudging is a peril, it is not a “cause of loss” because it is not a peril insured against. The policy will not cover damage caused by agricultural smudging.

A “hazard” is an increase in the probability that a loss will occur. having an open fireplace without a fireplace screen is a hazard. The lack of a screen increases the probability that a fire loss will occur.

Example: Consider a cracked sidewalk, a pile of oily rags, or a broken hand rail on a stairway. Are these hazards?

Answer: Yes, these types of hazards are called “physical” hazards.

There are three types of hazards:

1. A “physical” hazard is the use, condition, or occupancy of property, such as the fireplace or handrail used in the previous examples.

2. A “moral” hazard is the characteristics and behaviors of people, such as the tendency of a dishonest person to steal; such characteristics and traits increase the chance of a loss.

3. A “morale” hazard is the state of mind or attitude of a person that increases the chance of loss. The person doesn’t worry about a potential loss and may take fewer precautions.

Example: Jack’s neighbor, Jim, left his keys under the welcome mat and paid someone to steal his old TV—is this a moral hazard?

Answer: This moral hazard increased the likelihood of a theft claim.

Example: Jack doesn’t lock his front door when he leaves for work in the morning—is this a morale hazard?

Answer: This morale hazard increases the chance of a theft or vandalism claim.

In a named perils policy, it is incumbent upon the insured to prove the peril that caused the loss or damage. In an open perils policy, the insurer must prove that an exclusion applies. The following perils are considered “named perils” and insure property included in the hO-2, hO-4, hO-6, and the personal property section of the hO-3 policies:

Fire Direct physical damage caused by fire includes flame, smoke, soot, excessive heat, and scorching. It also includes direct damage caused by firefighters while putting out a fire. Indirect losses, such as a hole in the roof or water damage that are caused by the firefighters are also covered. Only damage caused by a hostile fire is covered.



LightningAs a phenomenon of weather, lightning is naturally generated electricity from the atmosphere. The policy covers damage caused directly by lightning and from the fire caused by lightning.

Windstorm or HailWindstorm is the natural movement of air and can range from a strong gust of wind that causes a tree to fall and damage Jack’s roof to a tornado or Category 5 hurricane that can destroy a home. Some policies include wind exclusions that limit coverage for damage caused by wind. Hail is frozen precipitation and can range from very small pea-sized pellets to large, grapefruit-sized chunks of ice.

ExplosionExplosion is not defined in the policy, so the interpretation can be broad. One definition that has evolved from common law is that explosion is a sudden, accidental, and violent bursting usually accompanied by a large noise.

Riot or Civil CommotionA riot is a violent public disorder or disturbance of the peace by 3 or more persons with a common intent to execute a violent and turbulent political act or to terrorize people. An act by one person throwing bricks is not a riot; it is an act of vandalism. A civil commotion involves more people and is more serious, such as a prolonged disturbance or one that is highly violent in nature.

AircraftAircraft are self-propelled vehicles capable of flight, such as helicopters and airplanes. The policy specifically includes self-propelled missiles and spacecraft. There is no requirement of direct physical contact between the aircraft and the damaged property. A sonic boom can cause direct physical damage by shattering windows. The policy also covers property damage from a motorized model or hobby aircraft.

VehiclesDefined by common law in some jurisdictions to be damage caused by a self-propelled conveyance with wheels, this peril is defined by others as the peril of vehicle collision. Some forms include restricted definitions and exclusions.

SmokeThis peril is defined as the “sudden and accidental damage from smoke, including the emission or puffback of smoke, soot, fumes, or vapors from a boiler, furnace, or related equipment.” The definition continues to describe perils that are not considered “smoke,” such as that caused by smoke from agricultural smudging or industrial operations. Essentially, smoke is particles in the air that are emitted from a burning substance.

Vandalism and Malicious MischiefVandalism is the intentional destruction or ruination of another person’s property. Malicious mischief adds the hateful component to the intentional, negligent, and unprovoked damage to, or destruction of, another person’s property.



TheftTheft is the unlawful taking of personal property with intent to deprive the rightful owner of it. Theft includes damage caused by attempted theft and loss of property from a known place when it is likely that the property has been stolen. The peril of theft does not insure theft committed by an insured or from that part of the residence premises that is rented to others. Property such as trailers, campers, and watercraft, when away from the residence premises, is not covered. Also not covered is theft of property at another residence owned by, rented to, or occupied by the insured when the insured is not living there. The property of an insured who is away at school is not covered for theft unless the student was on the premises where the theft occurred during the 90 days immediately before the loss.

Falling ObjectsThe falling object is not covered, but the damage it causes is covered, except when the property is contained within the dwelling and the roof or outside wall has not been damaged. If an insured drops something within the dwelling and causes damage, there is no coverage. If something falls from outside and damages the roof or outside wall before damaging property inside the dwelling, there is coverage.

Weight of Ice, Snow, or Sleet This peril is covered when the weight causes damage to a building or property contained in a building.

Accidental Discharge or Overflow of Water or SteamThe discharge or overflow must occur within a plumbing, heating, air conditioning, or automatic fire protective sprinkler system, or from within a household appliance. The system or appliance itself is not covered. Loss caused by freezing is not covered under this peril. Damage occurring on the residence premises that was caused by discharge or overflow originating off the premises is excluded. Any loss caused by mold, fungus, or wet rot is excluded unless it is hidden within the walls or ceilings, beneath the floors, or above the ceilings. A sump pump or related equipment, roof drain, gutter, downspout or similar equipment are not considered covered systems or appliances.

Sudden & Accidental Tearing Apart, Cracking, Burning, or BulgingExcept for freezing, this plumbing and heating peril covers steam or hot water heating systems, air conditioning or automatic fire protective sprinkler systems, and appliances used for heating that suddenly and accidently tear apart, crack, burs, or bulge.

Freezing Freezing of a plumbing, heating, air conditioning, automatic fire protective sprinkler system, or household appliance is covered under this peril. There is no coverage if the insured fails to maintain heat in the building or shut off and drain systems and appliances of water.

Sudden and Accidental Damage from Artificially Generated Electrical CurrentArtificially generated damage means any electrical current other than naturally generated electrical charges. Examples of naturally occurring current include lightning or static electricity and an example of artificially generated electrical current is a power surge. Not covered under this peril is loss to tubes, transistors, electronic components or circuitry that are part of appliances, fixtures, computers, home entertainment units or other types of electronic apparatus.



Volcanic EruptionThis peril eliminates any confusion as to whether the damage caused by an erupting volcano is covered under the explosion peril. Damage from the violent discharge of steam and volcanic material—including airborne shock waves, volcanic ash, and lava flow—are covered. If structural damage occurs as a result of this covered peril, the debris removal is also covered. Aftershocks that occur within 72-hours after the initial eruption are covered as part of the same volcanic eruption, thus allowing for the submission of a single claim and application of one deductible. Damage from earth movement, earthquake, land shock waves, or tremors is not covered.

Sinkhole CollapseAAIS includes sinkhole collapse as a named peril. Sinkhole collapse results from subterranean voids created by the action of water on a limestone or similar rock formation. The dwelling and other structures only are covered. Not covered is the cost of filling the sinkhole or the value of the land.)

Basic, Broad, and Open Perils



1. which of the following is NOT considered an insured under the homeowners policy?a. Person responsible for the named insured’s animalsb. A son, age 26, who is a student away at college, but still living with his parents during the summer.c. 16 year old foster child under the care of the insured’s aunt who lives with the insured. d. A gardener who uses the insured’s pick-up truck to pick up landscaping supplies.

2. An accidental, unintended happening is called a(n) __________________a. Bodily injuryb. Accidentc. Incidentd. Occurrence

3. If a dwelling is neither inhabited nor furnished, it is considered:a. Vacant b. Unoccupiedc. Rentald. Seasonal

4. what is the maximum number of family units in one dwelling that qualifies for a homeowners policy?a. 1b. 2c. 3d. 4

5. Which of the following would not qualify for the Additional Insured endorsement to the homeowners policy?a. The interest of the non-resident owner of a two-family building b. One of two co-owners, where each resides in respective units in a two-family dwellingc. A person selling a home under a land contractd. Home owner creates a life estate arrangement

6. An owner of a condominium or cooperative unit is eligible for which homeowners policy?a. hO-1b. hO-4c. hO-6d. hO-8

7. The peril of fire is not defined in the policy. what determines the definition of “fire” during the claim investigation?a. Fire departmentb. Common Lawc. Claim Adjusterd. Civil Law

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8. A(n) ___________ fire is one that burns where it is not supposed to burn.a. Friendlyb. Fireplacec. Hostiled. Unfriendly

9. which of the following is a morale hazard?a. A dishonest actb. Cracked sidewalkc. An irresponsible persond. A person that takes few precautions

10. which of the following losses is an indirect loss?a. hole in the roof caused by a fireman’s hoseb. Soot created within a chimneyc. Excessive heat causing a flamed. Fire inside a fireplace

11. A loss is covered in which of the following theft situations?a. A theft loss to property in a rented room.b. Damage caused during an attempted theft loss.c. Theft of property from the insured’s summer home while the insured is fishing on the lake.d. Theft of a camper at a campground.

12. The peril of weight of snow, ice, and sleet covers which of the following?a. Fence surrounding the insured’s premisesb. Swimming poolc. House foundationd. Property contained in a building



Chapter 3

Sections I and II Coverages of the Homeowners Policy

In this chapter, we will look at the sections of the homeowners policy and its coverages as well as its exclusions. Once we understand how each coverage works, we will put them together in the policy forms.

The coverages in the homeowners policy are:

• Section I – Property Coverages

◦ Coverage A – Dwelling (AAIS: Residence) ◦ Coverage B – Other Structures (AAIS: Related Private Structures) ◦ Coverage C – Personal Property ◦ Coverage D – Loss of Use (AAIS: Additional Living Costs and Loss of Rents)

• Section II – Liability Coverages

◦ Coverage A – Dwelling (AAIS: Residence) ◦ Coverage B – Other Structures (AAIS: Related Private Structures) ◦ Coverage C – Personal Property ◦ Coverage D – Loss of Use (AAIS: Additional Living Costs and Loss of Rents)

Section I – Property CoveragesCoverage A – Dwelling Professional agents perform their jobs best when working with informed clients who have been provided with enough coverage to protect them adequately when disaster strikes. The agent must advise the client to purchase enough insurance to pay for the costs of rebuilding or replacing insured dwellings and attached structures. If the client fails to purchase adequate insurance, he or she will be underinsured at the time of a loss. Coverage A insures the dwelling, attached structures and fixtures, and materials and supplies located either on or next to the residence premises that are intended for use in the construction, alteration, or repair of the dwelling or other structure on the premises. The Section I deductible applies to Coverage A.

It is important to note the word “attached.” Examples of attached building items that are insured under Coverage A include built-in cabinets, appliances, plumbing, heating, and permanently installed air-conditioning systems, electrical wiring, wall-to-wall carpeting, and fences if they are attached directly to the dwelling. If a building is attached to the main dwelling, whether by wall or by roof, that building is considered part of the dwelling. For example, garages and car ports are covered if they share a wall or the roof line with the dwelling.

If the structure is not attached, and there is a clear separation between the dwelling and the structure, the structure is insured under coverage, Coverage B - Other Structures.

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21ChAPTEr 3: SECTIONS I AND II COvErAGES OF ThE hOMEOwNErS POLICY

Example: Jack’s brother-in-law tells you he has a guest house. After further questioning, you learn there is a walkway between the guest house and the main house. However, the walkway is really a breezeway and it connects to the main house by a common roof. Is the guest house considered part of the dwelling and covered under Coverage A?

Answer: Yes, since the guest house is connected by the roof to the main house, it is part of the dwelling and covered under Coverage A – Dwelling.

Coverage A is intended to indemnify the insured for the costs to repair or replace damaged property if the home is damaged by fire, hail, lightning, or other covered perils.

Coverage A provides no coverage for the following:

LandLand is not covered because, even if damaged, does not depreciate or lose value. However, liability claims arising from the premises, lot, or land are covered.

Flood Flood coverage can be obtained by the purchase of a separate policy from the National Flood Insurance Program or a private insurer. Agents should advise all applicants and clients that all homeowners policies specifically exclude loss or damage caused by flood.

EarthquakeEarthquake coverage can sometimes be added by an endorsement to the policy; however, in most states subject to significant earthquake exposure, the earthquake risk must be covered under a separate policy.

Routine wear and tear, maintenance and neglectMaintenance-related problems, normal wear and tear, and the insured’s failure to care for property are the homeowner’s responsibility. Claims that arise out of these situations may be difficult to handle as the insured might be considered a morale hazard.

Coverage B – Other StructuresCoverage B provides coverage for detached structures on the residence premises that are separated from the dwelling by clear space. Examples include garages, sheds, gazebos, and swimming pools. Other structures also include fixtures only attached to land, such as fences, driveways, patios, sidewalks, ornamental rock gardens, and retaining walls. While clear space is an indicator of Coverage B, other structures connected by a fence, utility line, or similar connection are also covered.

The amount of insurance automatically provided for Coverage B is 10% of the Coverage A limit; it applies to all of the insured’s other structures. Use of Coverage B does not reduce the limit applying to Coverage A. Coverage B can be increased if the value of all the other structures on the residence premises exceed 10% of the Coverage A limit. The policy deductible applies to losses under this coverage.

Coverage B will indemnify the insured for the costs to repair or replace the other structures if damaged by fire, hail, lightning, or other covered perils.

Coverage B provides no coverage for the following:

LandLike Coverage A, land is not covered.



BusinessDetached structures used primarily for business purposes are not covered and need to be covered by a separate, commercial or business owner’s type of policy. Detached structures from which business is conducted on an incidental and an approved basis are not covered unless an endorsement is added to the policy.

RentalOther structures rented or held for rental to any person other than a tenant of the dwelling are not covered. The exception is rental of a private garage for garaging purposes. An endorsement is available to remove this exclusion if another structure is rented for residential dwelling purposes.

Business StorageOther structures used to store “business” property are not covered. The exception is “business” property including gas or liquids other than a vehicle fuel tank, that is solely owned by the insured or a tenant of the dwelling.

Clearly, underinsuring or improperly insuring other structures will cause problems. The agent and the insured must take steps in advance to avoid such situations.

Example: Jack’s dwelling is insured for $400,000 under Coverage A. He also has a variety of other structures on the residence premises. Recently, a large brush fire occurred in the area, and it destroyed a small barn and damaged an attached garage on the property. Jack’s pool also sustained significant damage from the fire and the pool’s pump, heater, and a solar heating system were also damaged.

The replacement and repair costs were as follows:

Barn – $30,000

Garage – $25,000

Pool repair and cleanup – $5,000

Pool pump, heater, and solar system – $15,000

Ignoring the deductible, how much could Jack collect from his insurance company for this loss? (Assume no other unusual circumstances or losses.)

Answer: The garage was attached, so the $25,000 cost to replace the damaged portion was fully covered under Coverage A. If the insured had the standard 10% of Coverage A applicable to Coverage B, then there was a total of $40,000 available to pay claims. However, the total of all losses to other structures was $50,000 ($30,000 for the barn, $5,000 for the pool repair, and $15,000 for the pool and related equipment). The insured could only collect $40,000, thus there was a $10,000 shortage.

Coverage C – Personal Property Coverage C, often referred to as Contents Coverage, applies to personal property owned or used by the insured while it is anywhere in the world. Personal property of guests and residence employees, while on the residence premises, is also covered if the named insured elects it to be covered after a loss. Examples of covered personal property include furniture, clothing, linens, televisions, audio equipment, dishes, and other personal items owned by the insured, the insured’s family members who live in the residence premises, and others who are defined as an “insured” under the policy.

The standard amount of insurance under Coverage C is 50% of Coverage A. However, many insurers have increased those limits to 70% or 80% of Coverage A. The policy deductible applies to losses under this coverage.



The policy limits coverage for certain types of property and excludes coverage for other types of property:

Other ResidencesThe limit for personal property usually located at an insured’s residence other than the residence premises is 10% of Coverage C, or $1,000, whichever is greater. If the insured has moved out of the residence due to repairs, renovations, or rebuilding, this 10% limit does NOT apply. Also, in a newly acquired principal residence, the limit does not apply for 30 days from the time the property began to be moved.

Self-storage FacilitiesThe limit for personal property owned or used by an insured and located in a self-storage facility is 10% of Coverage C, or $1,000, whichever is greater. If the insured has moved out of the residence due to repairs, renovations, or rebuilding, this limit doesn’t apply. The limit also does not apply if the property is usually located in an insured’s residence other than the residence premises.

Special Limits for Certain Classes of Personal PropertyMany insurers establish special limits of liability for certain types of personal property. These limits do not increase the total limit of liability for Coverage C; instead, they set maximum limits for certain higher risk items insured by the homeowners policy.

If the insured believes the standard policy form does not adequately insure the value of these items, the agent should advise the insured to consider separate coverage. Such separate coverage can be purchased in the form of a separate policy, often referred to as inland marine coverage or personal property floaters, or coverage may be added by adding the Scheduled Personal Property endorsement to the homeowners policy. Using any of the methods, separate coverage will provide much broader protection than the unendorsed homeowners policy does. Most inland marine and personal property floaters do not contain a deductible.

Special limits of liability usually apply to the following classes of personal property:

• Money

• Coin and stamp collections

• Jewelry

• Guns

• Furs and fur garments

• Silverware

• Portable electronic equipment

• Camera equipment

• Musical instruments

• Golfer’s equipment

• Antiques

• Collectible items

The special limits vary depending upon the type of property, where it’s located at the time of loss, and the insurer’s guidelines. The limit per class of personal property is usually the total limit per occurrence for all property in the specific class (e.g., jewelry). Some classes of property require a deductible; others don’t. Some policys may not provide theft coverage away from the insured’s premises or no wind and hail coverage unless items are located inside a fully enclosed structure.



The following special limits apply to the ISO hO 00 03 form (2011 edition), and they vary on other policy forms (i.e., AAIS or insurers’ manuscripted forms). The dollar values listed represent the total limit applicable to any one loss. This listing contains a general description of the more common special limits and coverage under any policy is always subject to conditions, limitations, and exclusions contained in the contract:

• $200 (AAIS: $250) on money, notes, gold, silver other than silverware, coins, and metals, stored value cards, smart cards, and scrip

• $1,500 on securities, letters of credit, passports, tickets, stamps

• $1,500 on watercraft including its trailers, equipment, and outboard motors

• $1,500 on trailers not used with watercraft

• $1,500 (AAIS: $2,500) for loss by theft of jewelry, watches, precious and semi-precious stones, and furs

• $2,500 for loss by theft of firearms and related equipment

• $2,500 for loss by theft of silverware, silver-plated ware, goldware, platinumware, pewterware, including silver, gold, or pewter flatware, hollowware, tea sets, trays and trophies

• $2,500 on property on the residence premises that is used primarily for business purposes

• $1,500 on property away from the residence premises and used primarily for business purposes

• $1,500 on portable electronic equipment that reproduces, receives or transmits audio, visual, or data signals, is designed to be operated by more than one power source, and is in or upon a motor vehicle

• $250 for antennas, tapes, wires, records, disks or other media

The insured should be encouraged to maintain adequate documentation of all personal property, including

• Serial and model numbers

• Purchase dates

• Prices and values

• Still or video pictures

• Records, receipts, and pictures should be stored away from the premises, such as in a safe deposit box or remotely in an electronic format

Coverage C Property Not Covered: Property separately described and specifically insuredArticles separately described and specifically insured, regardless of the limit for which they are insured in any insurance policy, are not covered by the homeowners policy.

Animals, birds, or fish Motor vehiclesNo coverage is provided for motorized vehicles unless they are not required to be licensed for use on public roads AND are used to service a residence or assist the handicapped.

Example: An ATV the insured takes to various off-road locations, such as the sand dunes, is not covered on the homeowners policy. A garden tractor the insured uses to mow his lawn and to haul materials around the residence property is covered.



AircraftThe aircraft exclusion applies to any conveyance used or designed for flight. Model and hobby aircraft not used to carry people or cargo are covered.

HovercraftHovercraft is excluded and means a self-propelled motorized ground effect vehicle and includes flarecraft and air cushion vehicles.

Roomers, boarders, and other tenantsUnless the property is owned by someone who is related to an insured, personal property of roomers, boarders, and other tenants is not covered.

Property in an apartment rented to othersProperty owned by the insured and in an apartment regularly rented or held for rental to others is not covered; however, an Additional Coverage does provide $2,500 of coverage, per rented unit, for Landlord’s Furnishings.

Rented property off-premisesProperty rented or held for rental to others off the residence premises is not covered.

Business dataBusiness records, regardless of where and how stored, is not covered. The cost of blank recording or storage media and prerecorded computer programs available on the retail market are covered.

Credit cardsCredit cards and electronic fund transfer cards or access devices used solely for deposit or withdrawal or transfer of funds are not covered. An Additional Coverage does provide limited coverage of $500 for such cards and devices.

Water or steamWater and steam are not considered covered property.

Additional items not provided coverage while away from the insured premises include:

• Unattached camper bodies

• Trailers not used with watercraft

• Building materials and supplies

Often, the homeowners policy provides no coverage for electronic devices or accessories that can be operated from the electrical system of a motor vehicle or watercraft while they are in or on the vehicle or watercraft and would need coverage from the insured’s personal auto policy, for instance, a portable GPS in a car.

The agent should encourage clients to report major purchases of personal property to be sure adequate coverage is provided by the homeowners policy. Many insurers have stock brochures to assist clients keep an organized inventory of their belongings; some insurers of higher value homes will even include inventory help as part of their homeowners program.



Coverage D – Loss of Use (AAIS: Additional Living Costs and Loss of Rent)Coverage D provides coverage for three types of indirect loss: Additional Living Expense, Fair Rental value, and Civil Authority Prohibits Use. Coverage is triggered when the residence premises is not fit to live in because of direct damage caused by a covered peril.

Additional Living Expense coverage makes payment for non-continuing living expenses (those over and above the insured’s normal living expenses) that arise from a covered loss. These are additional or increased living expenses necessitated by the insured’s inability to live in the dwelling or use a structure while repairs or reconstruction take place.

Example: A fire in the kitchen of Jack’s home caused smoke damage. Jack and his family can’t live in the home and are now staying in an apartment until the damage is repaired. Their monthly expenses are $2,000 for the mortgage, $200 for property taxes, $250 for homeowners insurance, and $300 for utilities. The monthly rent for the apartment is $1,800 plus another $200 for utilities.

How much should Jack expect to receive from his insurer under Additional Living Expense coverage?

Answer: The only expenses that are in excess of Jack’s normal, continuing expenses are the apartment’s rent and utilities. Thus, Jack will receive $1,800 plus $200 for a total of $2,000 if he is unable to live in his home for a month.

It should be noted that the Additional Living Expense portion of Coverage D is intended to reimburse insureds for only the increase in living expenses necessary to maintain their normal standards of living. The insured will not be reimbursed for regular and ongoing expenses, such as mortgage payments, groceries, and utilities.

Example: If Jack decided to stay at a hotel and dine out every night instead of renting an apartment and eating in, would the policy pay for those expenses?

Answer: It all depends on Jack’s lifestyle. If he lives in a small three bedroom home in a modest neighborhood, the insurer will only reimburse an amount that represents a hotel typical of his lifestyle. However, if Jack lives in a 10,000 square foot home in the most expensive part of town, it is possible the insurer will reimburse the costs of a hotel and meals. Remember, the reimbursement is for additional expenses necessary to maintain a normal standard of living.

Fair Rental Value coverage makes payment for the fair rental value of that part of the residence premises rented by the insured, or held for rental to others, that is unfit to live in after a covered loss. Essentially, because the tenant can no longer occupy the damaged portion of the residence, he or she won’t be paying rent and the insured won’t receive that expected income. Coverage D covers the fair rental value less any expenses that aren’t ongoing.

Payment for additional living expense and fair rental value is made for the shortest time needed to repair or replace the damaged property or for the insured to settle elsewhere.

Civil Authority Prohibits Use coverage makes payment for additional living expense and fair rental value in certain circumstances when the residence premises doesn’t suffer direct damage. This coverage applies after circumstances that require government agencies to deny access to damaged areas, sometimes for long periods of time. Evacuation or prohibited use after wildfires, explosions, and other natural disasters trigger coverage, but the loss must arise from a covered peril.

Example: On Sunday, a brush fire broke out near the Jack’s parent’s family home. On Monday everyone in the neighborhood was forced to evacuate. Jack decided to drive to the desert, stay at a hotel, and enjoy a small family vacation while they were evacuated. He and his family returned home on Friday night and learned they were allowed back home on Thursday morning. What expenses might he be entitled to under Civil Authority Prevents Use coverage?

Answer: If the evacuation was required by the civil authorities, Jack would be reimbursed for his additional living expenses while evacuated. However, because they could have returned home on Thursday, Friday’s expenses will not be reimbursed.



Losses or expenses not covered under Coverage D include the cancellation of a lease or agreement.

The period of time for which additional living expense and fair rental value are paid is limited to the shortest time required to repair or replace the premises or, if the insured moves to a new, permanent residence, the shortest time for relocation to be completed. Additional living expenses, loss of rent, and civil authority prohibited use expenses are not limited by the expiration of the policy.

Many policies limit Coverage D to 20% of the Coverage A limit of liability. Some policies may provide coverage for an unlimited amount in terms of dollars, but they will limit the amount of time. As is the case with many of the coverages under the policy, higher limits are available by endorsement. The deductible does apply to this coverage.

Section II – LiabilityCoverage E – Personal Liability (AAIS: Coverage L)Coverage E provides coverage for claims and lawsuits brought against an insured because of bodily injury or property damage that are caused by an occurrence that takes place during the policy period—to which this coverage applies. Also covered are certain supplementary payments, such as claims expenses, premiums for bonds, lost wages to assist the insurer in the investigation or defense of claims and lawsuits, and interest incurred on settlements or judgments. No deductible applies to this coverage.

Payments are made for damages only if an insured is legally liable, up to the limit of liability appearing on the Declarations.

Bodily Injury means bodily harm, sickness, or disease and includes the required care, loss of services, and death that results. Emotional injury and embarrassment are not included in this definition.

Property Damage means physical injury to, destruction of, or loss of use of tangible property or premises.

The standard limit of liability is $100,000 and is included at no additional premium. Higher limits are available at a modest premium increase. Agents should be diligent when working with clients and advising them about purchasing adequate financial protection for their individual needs, assets, and responsibilities. Because the costs of defense are often higher than settlements and judgments, defense coverage is extremely valuable. The policy requires the insurer to continue providing a defense, in addition to the limit of liability appearing on the Declarations, until the policy exhausts its limit of liability by payment of a judgment or settlement.

Having too little liability protection is common because people don’t expect to be responsible for causing injury or damage—or to be sued.

Example: Marie’s sister, Joan, has a mixed breed dog, Buttons, who only weighs 35 pounds but is quite exuberant. Emily, a 4-year-old neighbor, was visiting and Buttons nipped her ankle during her visit. Emily’s parents sued Joan, whose homeowners insurer settled the lawsuit for $25,000.

Even friendly dogs can injure someone. Almost 5 million dog bites occur each year and, of those, approximately 800,000 require medical care. Nearly a third of all homeowners liability claim payments are due to dog bites and insurers pay almost $500 million in dog bite claims annually.

Owning a dog isn’t the only liability hazard that a homeowner might have. A few examples of unexpected liability claims include:

• Neighbor’s child falls out of a tree in the insured’s back yard and breaks her leg

• Insured hits a golf ball and breaks the picture window of a home on the 8th hole

• A guest trips on broken porch steps, falls, and sprains an ankle

• A guest is injured when diving into the insured’s swimming pool



Coverage F – Medical Payments to Others (AAIS: Coverage M)Coverage F provides coverage for necessary medical expenses incurred because of bodily injury sustained in an accident; legal liability of an insured is not a requirement of coverage. The expenses must be incurred within three years of the date of the accident and include reasonable charges for medical, surgical, x-ray, dental, ambulance, hospital, nursing, and funeral services. (AAIS adds to the list hearing aids, prescription drugs, and eyeglasses, including contact lenses.)

Coverage does NOT apply to the named insured or regular residents of the household. The limit of insurance is designated on the declarations and applies per person, per accident. No deductible applies to this coverage.

Medical payments to others coverage applies to a person injured on the insured location with the permission of an insured. It also applies to accidents that occur away from the insured location if the bodily injury arises out of a condition on the insured location, or from the ways immediately adjoining the insured location or premises. The accident can be caused by:

• The activities of an insured.

Example: The insured and his son are in the park playing a game of “catch.” The son accidentally hits a passerby on the head with the ball. Would medical payments coverage apply?

Answer: Yes, because the insured’s son is an insured and his activities caused bodily injury to another person.

• A residence employee while acting within the scope of employment by the named insured.

Example: Every Tuesday, the insured’s gardener mows the insured’s lawn. One Tuesday, he left the lawn mower running while he turned off a sprinkler. The mower rolled down a hill and injured a neighbor. Would medical payments coverage apply?

Answer: Yes, as a residence employee, the gardener’s actions are within the scope of his employment by the named insured.

• An animal owned by, or in the care of, an insured.

Example: A friend is taking care of the insured’s dog while the insured is on vacation. When out for a walk, the insured’s dog bites a child. Would medical payments coverage apply?

Answer: Yes, the dog is owned by the insured.

Coverage E and F Increased Limits of LiabilityThe following charts illustrates how inexpensive it is to increase liability limits in the homeowners policy:

Coverage E Limit Premium Coverage F Limit Premium

$100,000 Base $1,000 Base$200,000 $6.00 $2,000 $5.00$300,000 $9.00 $5,000 $14.00$500,000 $12.00

$1,000,000 $24.00

The additional premiums actually charged insurers vary; however, they are relatively inexpensive. Optional higher liability limits should always be a part of the professional agent’s quote or presentation. If a prospective or existing client refuses to purchase a reasonable level of liability coverage, or the agent senses or is aware that the limits selected will not be adequate in the event of a serious loss, the agent should ask for a written statement of refusal of higher limits. That documentation should be retained in the client’s file.



1. which of the following is not considered an “attached” item covered under the homeowners policy?a. Dishwasherb. Kitchen cabinetsc. Area rugd. Central air-conditioning system

2. The homeowners policy does not cover which of the following?a. Landb. Garden shedc. Grassd. Ornamental rock garden

3. Coverage B provides coverage for each of the following, EXCEPT:a. Gazebob. Above-ground swimming poolc. Utility line connected to the dwelling roofd. Shed

4. The standard amount for Coverage B is _______% of Coverage A.a. 10b. 15c. 25d. 50

5. The standard amount of Coverage C is ______% of Coverage A. a. 10b. 15c. 25d. 50

6. The limit for personal property owned by an insured and located in a self-storage facility is 10 % of Coverage C, or $_________, whichever is greater. a. $100b. $1,000c. $1,500d. $5,000

7. hO-3 Coverage C includes limitations on certain property. The dollar values of each of the following represent the total limit in any one loss, EXCEPT:a. $200 on money, notes, gold, and silverb. $1,500 on securities, letters of credit, passports, tickets, stampsc. $3,000 on watercraft including outboard motorsd. $1,500 for loss by theft of jewelry and watches

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8. which of the following is covered under Coverage C? a. The pet dogb. A garden tractorc. Waterd. Hovercraft

9. which of the following is not covered under homeowners Policy—Coverage D?a. Additional Living Expense b. Fair Rental Value c. Mortgage Expensed. Civil Authority Prohibits Use of Property

10. Coverage D payments would include each of the following expenses, EXCEPT: a. Motel expensesb. Food expenses exceeding the normal monthly cost of foodc. Mortgage d. Tenant’s rent

11. Coverage E under Section II of the homeowners policy covers each of the following, EXCEPT:a. Negligent property damage by the insuredb. Premiums on bondsc. Medical paymentsd. Interest on settlements

12. The Section II medical payments to others expenses must have incurred or were medically determined within ___________ from the date of the occurrence. a. 12 monthsb. 60 monthsc. 2 yearsd. 3 years


Chapter 4

Homeowners Policy FormsSeveral forms of homeowners coverage are available, each designed to offer coverage for specific types of risks. The designations used for these policies are somewhat standard among insurers and states, but many insurers also use their own individual policy names and/or form numbers.

Agents should be familiar with their insurers’ underwriting guidelines and provisions regarding their homeowners forms. The policy forms are used to structure policy provisions, and any number of variations concerning risk, coverage, limitations, and exclusions. Agents also need a working knowledge about what the competition offers in order to provide realistic, reliable, and competitive quotes and advice.

Homeowners policies insure not only owner-occupied dwellings but also condominiums and apartments. A number of different policies are available, depending on the applicant, the type of property being insured, and the level of coverage provided. This chapter will review the following forms:

• Owner-occupied residential dwellings

◦ hO-1 (AAIS only) ◦ hO-2 ◦ hO-3 ◦ hO-5 ◦ hO-8

• Rented residential apartments and dwellings

◦ hO-4• Condominium and cooperative units

◦ hO-6Only those persons who both own and occupy the insured dwelling are eligible to purchase coverage under homeowners forms hO-2, hO-3, hO-5, and hO-8. The owner of a condominium or cooperative unit may purchase coverage under a hO-6 form and the unit may be occupied by the owner or a tenant. The hO-4 form is used when the insured is the tenant of an apartment, dwelling, or other eligible residential unit.

The Section I perils common to most homeowners forms are the 16 named perils:

• Fire or lightning

• Windstorm or hail

• Explosion, riot or civil commotion

• Aircraft

• Vehicles

• Smoke

• Vandalism or malicious mischief

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• Theft

• Falling objects

• Weight of ice, snow or sleet

• Accidental discharge

• Sudden and accidental tearing apart

• Freezing

• Artificially generated electrical current

• Volcanic eruption

HO-1 – Basic Form – AAIS onlyThe hO-1 is the basic policy in the homeowners family, and it offers the least amount of coverage. It is a named perils policy covering fire or lightning, windstorm or hail, vandalism or malicious mischief, theft, damage from vehicles and aircraft, explosion, riot or civil commotion, glass breakage, smoke, volcanic eruption, and personal liability. ISO has withdrawn this form from use, but it is available in the AAIS program.

HO-2 – Broad FormThe hO-2 is also a named perils policy. It provides the coverages available under hO-1 but broadens the coverage by adding perils to include the 16 named perils, or broad form perils.

All covered property is insured on a named peril basis under the hO-2. while dwelling losses are settled on a replacement cost basis, personal property losses are settled on an actual cash value basis.

The hO-2 form was the predominant form of coverage in use for many years. Because it provides limited coverage, the hO-3 has become more popular. Some insurers use the hO-2 form as an underwriting tool to restrict coverage for risks that don’t meet all their homeowners underwriting criteria.

HO-3 – Special Form The hO-3 is the most common homeowners form in use today, although hO-5 forms are being requested and issued on a more frequent basis. It provides insurance for the dwelling and other structures on an open perils basis, meaning it insures against all risks of loss except those specifically excluded in the policy. The insuring agreement reads:

We insure against direct physical loss to property described in Coverages A and B.

The hO-3 lists the following exclusions to its open perils coverage for the dwelling and other structures:

Section I – ExclusionsThe exclusions that apply to Section I also apply to Coverages A and B.

CollapseAbrupt falling down or caving in; loss of structural integrity, and the resulting cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion

FreezingFreezing or resulting discharge, leakage or overflow of plumbing, heating, air conditioning or fire protection systems, or household appliances, is excluded unless the insured has used reasonable care to maintain the heat in the building or shut off the water and draining the systems and appliances of water. Sump pumps, roof drains, gutters, downspouts and similar equipment are not covered systems or appliances.


33ChAPTEr 4: hOMEOwNErS POLICY FOrMS

Also excluded is the freezing, thawing, pressure or weight of water or ice, whether driven by wind or not, to fences, pavements, patios, swimming pools, footings, foundations, or any other device that supports a building, retaining walls or bulkheads that do not support a building, and piers, wharves, or docks.

TheftTheft in or to a dwelling under construction, or of materials and supplies for use in the construction, until the dwelling is finished and occupied.

VandalismVandalism and malicious mischief and ensuing loss caused by intentional and wrongful acts if the dwelling has been vacant for more than 60 consecutive days immediately before the loss. A dwelling being constructed is not considered vacant.

Mold, fungus, or wet rotDamage is excluded unless it is hidden within the walls or ceilings or beneath the floors and is the result of the accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or fire protective sprinkler system or household appliance on the residence premises. Covered overflow may also occur from within a storm drain, or water, steam, or sewer pipes off the residence premises. Sump pumps, roof drains, gutters, downspouts, and similar equipment are not covered systems or appliances.

Wear and tearIncludes marring and deterioration.

Mechanical breakdownIncludes latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself.

Smog, rust, or other corrosionIncludes dry rot.

Smoke from agricultural smudgingFrom agricultural smudging or industrial operations.

SettlingIncludes shrinking, bulging or expansion and the resulting cracking of bulkheads, pavements, patios, footings, foundations, walls, floors, roofs, or ceilings.

Birds, rodents, or insects.

Animal nesting Includes infestation, discharge or release of waste products, or secretions by any animals.

Owned or kept animalsAnimals owned or kept by an insured.

Appliances from which water or steam escapesThe appliance or system from which water or steam escapes is not covered, even when the ensuing loss is covered.



PollutantsThe discharge, dispersal, seepage, migration, release or escape of pollutants unless it was caused by a peril insured against under Coverage C.

Pollutant means any solid, liquid, gaseous, radioactive or thermal contaminant, irritant or odor, including smoke, vapors, soot, fumes, acids, alkalis, chemicals, oil, oil products, sound emissions, visible or invisible electrical or magnetic emissions, and waste.

Waste means materials to be disposed of, reconditioned, recycled, or reclaimed.

For pollution cleanup, there is no coverage for any loss, cost, or expense arising out of any:

• Request, demand or order issued that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to or assess the effects of pollutants; or

• Claim or suit by or on behalf of a governmental authority or others for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to or assessing the effects of pollution.

HO-3 – Loss SettlementDwelling and other structures losses are settled on a replacement cost basis, and personal property losses are settled on an actual cash value basis. If an insured wishes to broaden named perils coverage to open perils coverage, or broaden loss settlement from actual cash value to replacement value, endorsements are available for purchase. (ISO and AAIS offer the HO-5 form to provide open perils coverage for dwelling, other structures, and personal property rather than using an endorsement.)

HO-5 – Comprehensive Form (AAIS – Special Building and Contents Form)Many insurers writing homeowners policies offer this type of policy, frequently marketed as a “deluxe” policy with very comprehensive coverage. Open perils coverage is provided for the dwelling, other structures, and personal property. The exclusions are the same as those contained in the hO-3; however, five additional exclusions apply to Coverage C in the hO-5:

BreakageEyeglasses, glassware, statuary, marble, bric-a-brac, porcelains, and similar fragile articles other than jewelry, watches, bronzes, cameras, and photographic lenses. Coverage applies if the breakage is due to a named peril in the hO-3 Coverage C.

Dampness of atmosphere (AAIS: Dampness and temperature)Includes extremes of temperature unless the direct cause of loss is rain, snow, sleet, or hail.

RefinishingAlso includes renovating or repairing property other than watches, jewelry, and furs.

Collision (AAIS: Watercraft)Includes sinking, swamping or stranding of watercraft, including their trailers, furnishings, equipment, and outboard engines or motors. Collision with a land vehicle is NOT excluded.

Acts or decisionsIncluding the failure to act or decide of any person, group, organization, or governmental body. Any ensuing loss to Coverage C property not precluded by any other provision is covered.



Under the ISO form, only Coverages A and B are subject to replacement cost loss settlement; Coverage C is subject to actual cash value loss settlement. (AAIS: 00005 provides replacement cost lost settlement to all covered property.)

The hO-5 form often is attractive to homeowners with larger homes, expensive furnishings, extensive jewelry and collections, or home office exposures. The hO-5 contains the same Special Limits of Liability found in the other homeowners forms.

Insurers that don’t offer the hO-5 form of coverage, provide open perils coverage for personal property via an endorsement.

HO-8 – Modified Coverage Form (AAIS – Limited Perils)The hO-8 policy is designed to meet various state guidelines by providing basic named perils coverage that is less broad than coverage provided by the other forms. It is not a commonly used form but may suit the needs of homeowners who own older and very ornate homes or those with homes located in declining neighborhoods where the replacement value far exceeds the market value.

replacement cost loss settlement is not available under the hO-8. where allowed by statute, the policy contains a repair cost loss settlement provision and usually stipulates that the same type of materials need not be used to repair damage or that it may pay only the actual cash value of the home, whichever is less. Provisions may vary among insurers and depending on state guidelines.

HO-4 – Contents Broad FormApproximately 35% of the U.S. population live in rental units and a high percentage of renters are under age 45. Coverage for renters provides necessary and significant financial protection, but the value of such coverage is often misunderstood and/or overlooked by renters and agents alike.

A landlord’s policy, regardless of the form of coverage, does not insure loss to the tenant’s possessions or the tenant’s personal liability exposure. Likewise, the renter’s policy does not cover the building or personal property owned by the landlord or the landlord’s liability exposure.

renters insurance provides coverages similar to that provided by hO-2 homeowners form except that it doesn’t insure real property: buildings or structures. Loss of use coverage is provided, and most of the homeowners endorsements not pertaining to building coverage are available to renters.

Eligibility for coverage under an hO-4 requires the insured to be a tenant of the residential unit in which the insured personal property is located. The following is a common example of hO-4 limits of coverage. (Note the absence of Coverages A and B.)

Coverage C — Personal Property $10,000 as minimum limitCoverage D — Loss of Use (20% of Coverage C) (20% of Coverage C)Liability $100,000Medical Payments to Others $1,000

Some common myths about renters insurance for professional consideration are:

The Non-affordability Myth: Most premiums are remarkably inexpensive, even for the younger or first-time tenant.

The Responsibility Myth: The parent’s policy does not cover a child’s property if the child is a tenant of a building that is not the residence premises or an “insured location.”

The Ownership Myth: “I don’t own very much so I don’t need insurance.” Most renters have far more property value than they think they do, and most have never considered taking an inventory of those belongings. In addition renters also have a personal liability exposure.



The Landlord Myth: “The landlord’s insurance covers me.” This is a widespread misconception concerning: the landlord’s policy never covers the tenant or the tenant’s property.

The professional agent must always be alert to tenants’ risks and needs. While the premium for a renters policy may be small, many tenants:

• Will purchase a home

• Already own vehicles

• May be, or become, a business owner

• Have current family needs for life, health, and retirement products

• May develop into a long-term and loyal client

Many agents have developed insurance accounts into successive generations, conducting an ongoing relationship with many members of the insured’s family. Also, many younger clients are looking for honest, dependable, common-sense assistance with their insurance needs.

More than 65% of renters do not have homeowners insurance. The key reason is cost, and the second reason is the lack of awareness that a homeowners product exists to cover their needs. Although many renters believe their property “is not worth much,” they typically own $25,000 or more of “stuff” that is uninsured.

Many insurers provide brochures to help establish personal property values, and the following chart reflects typical personal property or contents replacement values for the average two-bedroom apartment.

Personal Property Replacement Value $Furniture 8,907TV, VCR, Stereo, Tapes, CDs 1,777Home Computer 1,647Microwave 151Other Appliance 240Clothing 3,700Paintings, prints and Photos 792Glassware, China and Silverware 612Sports Equipment 795Cameras and Photographer’s Equipment 795Books 704Jewelry 1,023All Other Property 4,000Total Personal Property $24,948

HO-6 – Unit-Owners FormThe hO-6 form is similar to the hO-4 because it insures the personal property and personal liability exposures. The hO-6 is written for the owners of condominium or co-op units, while an hO-4 is written for a person who rents the residential unit in which they reside. The hO-6 also insures the unit owner’s exposure for specific improvements to parts of the building or premises. Unlike the hO-2, hO-3, hO-5, and hO-8, the hO-6 may also be written for the owner of a rental unit. An endorsement must be added to the hO-6 to cover the tenant occupancy exposure.

Condominium associations draft a “Master Deed” or “Declaration of Condominium,” setting forth the provisions and rights of ownership. Either these documents, or the bylaws of the association or corporation, will specify the insurance responsibility of each party to the ownership arrangement. These documents are



extremely important when determining the level of insurance needed by the unit owner. The agent should proceed cautiously through the legal documents because there is no standardization among the methods used to sell and manage this community form of home ownership.

The Condominium Declaration wording should provide information about what is covered under the master policy and what the insured must insure.

Example: The association’s insurance is “bare walls” coverage only; therefore, the building items (i.e., walls, floors, and ceilings) must be insured by the unit owners. These items include all fixtures; built-in appliances; interior partitions; plumbing; wiring; paint, paper, or paneling on the walls or ceilings; tile or carpet on the floors; and areas between the lowest floor and the highest ceiling.

Obviously, careful evaluation is needed because several thousand dollars of additional coverage may be needed to protect the unit owner’s structural interest as well as the personal household contents. A Coverage A component exists in the hO-6 and contains four elements:

1. Alterations, appliances, fixtures, and improvements that are part of the building contained within the residence premises. (AAIS: fixtures, alterations, decorations, additions, installations, and appliances that are part of the building including within the described location.)

2. Items of real property that pertain exclusively to the residence premises, such as the outdoor condenser that is part of the unit’s air conditioning system.

3. Property the condominium association requires the insured to insure.

4. Structures at the described location that are owned solely by the insured, such as a detached garage or shed.

The Coverage A limit under a hO-6 is $5,000 and is provided on a named perils basis, which can be upgraded to open perils. (AAIS: 10% of Coverage C.) If the insured owns, or is obligated to insure other structures, they are insured under Coverage A because no Coverage B is included in the form.

Under the hO-6, actual cash value loss settlement applies to personal property and grave markers. Loss settlement for property insured under Coverage A depends upon how quickly repairs or replacement is made. If damage is repaired or replaced within a reasonable time, the policy pays for the actual cost to repair or replace. If damage isn’t repaired or replaced within a reasonable time, loss payment is made on an actual cash value basis.

Common eligibility requirements provide for a minimum dollar amount of coverage and loss of use, and the unit must be owner occupied and used as a private residence. Other coverage concerns to consider are the requirements for protecting a common clubhouse, tennis courts, sidewalks, driveways, patios, pools, and yards including the potential loss assessments that may be made against the unit owner in the event of a loss to the building and/or these common elements.

Example: Jack’s niece, Barbara, purchased a condominium and asked his advice about insuring the condo. Jack referred Barbara to Tom Goodsense, who arrived at Barbara’s condo with the Condo Declarations in hand. From this document, Tom was able to review not only Barbara’s needs, but also the condominium association’s responsibilities. Barbara needed an HO-6 policy with enough Coverage C to insure her personal property and her own personal liability exposure. Because she was responsible for building items inside the exterior walls, she needed to buy dwelling coverage for the dry wall; flooring down to the concrete; plumbing, heating, and air conditioning units; and everything attached to the walls.



Homeowners Form Comparison of Typical PerilsThe various homeowners policy forms presented in the following chart are standard throughout the industry, although individual insurers and states may offer slightly different provisions or use other titles or names for the coverages.

Homeowners Coverage ChartPerils Covered Form Loss Settlement

HO-2 Broad FormBroad Form PerilsBroad Form Perils

DwellingContents

Replacement CostActual Cash Value

HO-3 Special FormOpen Perils

Broad Form PerilsDwellingContents


HO-4 Contents Broad FormBroad Form Perils Contents Actual Cash Value

HO-5 Comprehensive FormOpen PerilsOpen Perils

DwellingContents


HO-6 Unit-Owners FormBroad Form Perils Contents Actual Cash Value

HO-8 Modified Coverage FormBasic Form PerilsBasic Form Perils

DwellingContents

Less of Repair Cost/Mkt. ValueActual Cash Value



1. which of the following cannot be covered by a homeowners policy?a. Renter of an apartmentb. Owner of a condoc. Owner of a mobile homed. Owner of a single-family home

2. which homeowners policy will cover a tenant who needs property and liability coverage?a. hO-1b. hO-4c. hO-6d. hO-8

3. Losses to personal property under the hO-2 Broad Form policy will be settled on which method of valuation?a. Actual Cash Value b. Replacement Costc. Functional Replacement Costd. Open Peril

4. The dwelling and other structures coverages under the hO-3 policy will be settled on which method of valuation?a. Actual Cash Value b. Replacement Costc. Functional Replacement Costd. Open Peril

5. which of the following is excluded under the dwelling coverage in the hO-3 policy?a. Wear and tearb. Sump pumpsc. Mechanical breakdownd. Animal nesting

6. Losses to personal property under the hO-3 Special Form policy will be settled on which method of valuation?a. Actual Cash Value b. Replacement Costc. Functional Replacement Costd. Open Peril

7. Losses to personal property under the hO-5 Comprehensive Form policy will be settled on which method of valuation?a. Actual Cash Value b. Replacement Costc. Functional Replacement Costd. Open Peril

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8. Each of the following is specifically excluded under hO-5 Coverage C, EXCEPT:a. Acts or decisionsb. Breakage of eyeglasses due to vandalismc. refinishingd. Dampness of atmosphere

9. The hO-8 policy is best suited for which of the following situations?a. Market value far exceeds the replacement valueb. Functional replacement value far exceeds the replacement valuec. Replacement value far exceeds the market valued. Actual cash value far exceeds the replacement value

10. The hO-4 policy is similar to the hO-2 in each of the following ways, EXCEPT: a. Limitationsb. Owner occupancyc. Deductiblesd. Exclusions

11. In which of the following is the hO-6 policy not similar to the hO-4 policy?a. Covers personal property b. Provides liability coveragec. Covers structural parts of the buildingd. Broad form perils are covered

12. The _____________ is a tool to determine what coverage is needed for an hO-6 policy and provides the insurance responsibilities of the insured.a. Condominium Contractb. rules of Condominium Ownershipc. Condominium Commercial Property policyd. Condominium Declarations


Chapter 5

Homeowners Policy Property CoveragesThe coverages and exclusions reviewed through Chapter 6 are specific to either the policy form or Coverages A, B, C, or D. Coverages and exclusions apply to Section I in its entirety, as do certain conditions. Conditions are provisions in the insurance policy that state the rights and duties of both the insured and insurer. This chapter reviews the Section I – Additional Coverages, Exclusions, Conditions, and Endorsements.

Additional Coverages (AAIS: “Incidental Coverages”)The Additional Coverages originated as inducements to buy more insurance, but are now automatically included in the homeowners forms in addition to Coverages A through D.

Debris Removal Debris removal pays for the reasonable costs to remove debris of damaged property or fallen trees. Loss must be caused by a covered peril and cause direct damage to covered property. Restrictions, exclusions, and limitations apply to this coverage.

The limit per loss is $1,000 total and a sub-limit of $500 applies per tree for the removal of an insured tree felled by windstorm, hail, or weight of ice, snow, or sleet; or a neighbor’s tree felled by a Coverage C peril. The tree must have damaged covered property or blocked a driveway or a ramp designed for the handicapped.

The payment for the cost of the debris removal is made in addition to the limits of liability. However, if the applicable limits are exhausted by the loss to covered property, an additional 5% of the applicable limit is available.

Example: A fire destroyed an insured’s detached garage, and before reconstruction can start, the debris from the damaged building must be removed. Limits for Coverage A are $500,000, Coverage B limits are $50,000, and Coverage C limits are $250,000. The cost to replace the garage is $51,000, the cost to remove the debris is $8,000, and cost to replace the contents destroyed in the fire is $5,000. How much will be paid by the insurer for this loss?

Answer: Assuming the contents are covered on a replacement cost basis, the insured will receive $5,000. A maximum of $50,000 will be paid for the detached garage under Coverage B. Because the full amount of Coverage B was used to make loss payment for the damaged garage, the insured is limited to an additional 5% of Coverage B, or $2,500 for the debris removal, despite the $8,000 expense.

Reasonable Repairs Pays for reasonable costs incurred by the named insured to take measures to solely protect covered property from further loss or damage. Measures does not always mean full repairs, because the coverage is intended for quick or emergency action by the insured to minimize the extent of loss.

This coverage does not increase the limit of liability that applies to the covered property or relieve the named insured of duties after a loss to covered property.

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Example: A windstorm damaged a portion of the roof, and part of the roofing has been torn off. Rain is expected over the next few days. Since the house is a two story house, the insured decides to hire a contractor to cover the roof until repairs can be completed. Will the insured be reimbursed for this work?

Answer: These are reasonable steps to avoid further damage to the dwelling due to the upcoming rain. The insurer will most likely reimburse the insured for these costs, assuming the insurer deems them necessary to avoid further damage.

Trees, Plants, Shrubs, and Lawns Coverage for damage to trees, plants, shrubs and lawns is limited to the perils of fire or lightning, explosion, riot or civil commotion, aircraft, non-owned vehicles, vandalism and malicious mischief, and theft. Note: the perils of wind, hail, and weight of ice, snow, or sleet are NOT covered perils.

An additional amount of insurance equal to 5% of the dwelling amount of insurance is available and a sub-limit of $500 applies to any one tree, shrub, or plant. Property used for business purposes is not covered.

Example: During the night, thieves stole a recently planted sago palm from the insured’s yard. The insured paid $800 for the palm plus $400 to have it transported and planted, for a total of $1,200. The insured reported the theft loss to his carrier and was told he would receive only $500 in payment of his loss. Why didn’t the insured receive payment for $1,200?

Answer: The policy has a sub-limit of $500 per tree, shrub, or plant.

Fire Department Service ChargesThese service charges, if applicable, are covered under all the homeowners forms and are only payable if the insured is liable under contract or agreement. Coverage applies when a neighboring fire department charges a fee to assist the fire department in which the insured property is located. No coverage applies for charges by the fire department that protects the jurisdiction in which the insured is located. Coverage is limited to $500 per occurrence, is in addition to the limits, and the policy deductible does not apply.

Example: The insured received bills from two neighboring fire departments that were called to his home during a multiple alarm fire. Will those bills be covered under this additional coverage?

Answer: Yes, because they’re from neighboring fire districts that have a contract with the insured’s fire department, but they will be subject to the policy limit of $500.

Property Removed (AAIS – Emergency Removal)This additional coverage protects property against direct loss from any cause once it has been removed from the premises to avoid endangerment from an insured peril. Coverage is for no more than 30 days after the property is first moved and does not change the limit of liability that applies to the property being removed.

Example: A windstorm blew the roof off of the insured’s home and also damaged several windows. To limit damage to the building’s contents, the insured removed as much of his personal property as he could. After he temporarily placed his personal property in a storage unit, the unit was flooded and a number of the items were damaged.

Answer: Because the peril of windstorm caused the original damage, the property is covered for a direct loss from any cause (including flood which is normally not covered) while in storage up to 30 days.


43ChAPTEr 5: hOMEOwNErS POLICY PrOPErTY COvErAGES

Credit Card, Electronic Fund Transfer Card or Access Device, Forgery and Counterfeit Money Provides protection against theft or unauthorized use of the insured’s electronic fund transfer card or access device, credit cards, checks altered or forged by others, or acceptance in good faith of counterfeit money. Business cards and accounts aren’t covered and this coverage does not protect against dishonesty by any residents of the household or anyone entrusted with the card or access device.

The coverage will pay up to $500 (AAIS: $1,500), is additional insurance, and the policy deductible does not apply.

Loss AssessmentThe limit of $1,000 applies to loss assessments charged to the named insured as the owner or tenant of a corporation or association of property owners for damage to property owned by the collective members. The loss assessment must be the result of a direct loss due to any Coverage A peril except earthquake. Assessments charged by a government body are not covered.

This coverage is additional insurance and the policy deductible does apply.

Collapse Collapse means an abrupt falling down or caving in of a building, or any part of a building, with the result that the building cannot be occupied for its intended use. If a floor or roof is just sagging, or if the building is still standing, it is not in a state of collapse.

Collapse is covered if the direct physical loss was caused by any one of the Coverage C perils, hidden decay, hidden damage by insect or vermin, weight of contents, equipment, animals, or people, weight of rain collected on a roof, or use of defective material or methods of construction, remodeling, or renovation. An awning, fence, patio, deck, pavement, swimming pool, underground pipe, flue, drain, cesspool, septic tank, foundation, retaining wall, bulkhead, pier, wharf, or dock is not covered unless the damage is the direct result of the building collapse.

This coverage does not increase the limit of liability that applies to the damaged property.

Example: A balcony on the back of the insured dwelling has been sagging for several years, and rotting wood has been evident. Two years later, a portion of the balcony falls down onto the ground. Would this be covered under Collapse?

Answer: This is not covered as the collapse was due to poor maintenance. The insured could see evidence of the rotting wood and the sagging for some time, so the damage was not hidden.

Glass or Safety Glazing Material Coverage applies to breakage of glass or glazing material that is part of a covered building, storm door, or storm window. Damage to contents or covered property because of the glass breakage is included, but subsequent damage, such as rain entering, is not covered. Coverage is excluded if the dwelling has been vacant for more than 60 consecutive days prior to a loss.


Landlord’s FurnishingsCoverage is provided, for up to $2,500 in each apartment on the residence premises, for appliances, carpeting, and other household furnishings owned by the insured. Covered causes of loss are the Coverage C perils, excluding Theft.




Ordinance or Law Provides coverage for the increased costs incurred due to enforcement of building codes, laws, or ordinances in the construction, demolition, remodeling, renovation, or repair of a covered building or structure after a covered loss. Coverage also applies to the removal of debris of covered property. The loss in value of the covered property is excluded, as is the testing for pollutants. The limit of coverage provided is 10% of the limit for Coverage A.

This coverage is additional insurance.

Grave Markers Grave markers, vaults, and monuments are covered for up to $5,000 for loss caused by the Coverage C named perils. Coverage applies to property on or away from the residence premises.


Section I – Property ExclusionsOrdinance or LawThis exclusion does not apply to the insurance provided by the Additional Coverage.

Earth Movement`s earthquake, including land shock waves or tremors before, during or after a volcanic eruption; landslide, mudslide, or mudflow; subsidence or sinkhole; and any other earth movement including earth sinking, rising, or shifting. Direct loss by fire, explosion or theft resulting from earth movement is covered.

Water Water means flood, surface water, waves, tidal waves, tsunami, tides, tidal water, overflow of any body of water, or spray from any of these whether or not driven by wind or storm surge. Also excluded is water that backs up through sewers or drains, water that overflows or is discharged from sumps, and water below the surface of the ground including water exerting pressure on or seeps, sump pumps, and related equipment. water beneath the surface of the ground or water that leaks or flows through a building, sidewalk, driveway, patio, foundation, swimming pool or other structure; and water from a dam, levee, seawall or any other boundary or containment system is excluded, as well.

Direct loss by fire, explosion, or theft resulting from “water” is covered.

Power FailurePower failure originating away from the premises is excluded. If the failure results in a loss from an insured peril that occurs on the residence premises, the loss is covered.

NeglectLoss is not covered if it results from the neglect of the insured to exercise reasonable care to save or preserve property at, and after the time of a loss.

War War includes undeclared war, civil war, insurrection, rebellion, revolution, warlike acts by a military force or personnel, and destruction, seizure, or use for a military purpose. Discharge of a nuclear weapon is deemed a warlike act, even if it is an accident.



Nuclear HazardNuclear hazard means any nuclear reaction, radiation, or radioactive contamination, all whether controlled or not, or however caused, or any consequences of any of these. Any loss caused directly or indirectly by nuclear contamination or explosion is not covered. If there is an ensuing fire, the damage caused by the fire is a covered loss.

Intentional LossAn intentional loss is one that arises out of any act committed by an insured, or an act an insured conspired to commit, with the intention of causing a loss. In such a case, even if one insured caused the loss, another insured who did not commit or conspire to commit the loss is still precluded from coverage.

Governmental ActionGovernment action means the destruction, confiscation, or seizure of covered property by order of any governmental or public authority and is excluded unless it occurs at the time of a covered fire to prevent its spread.

Weather ConditionsApplicable to Coverages A and B only, this exclusion applies if weather conditions contribute in any way with a cause or event described in the previous exclusions.

Acts or DecisionsOnly losses to property insured under Coverages A and B that are caused by the acts or decisions, or failure to act or decide, by any person, group, organization, or governmental body are excluded.

Faulty, Inadequate, or DefectiveOnly applicable to property insured under Coverages A and B, losses due to faulty, inadequate, or defective planning, zoning, development, surveying, siting, design, specifications, workmanship, repair, construction, renovation, remodeling, grading, and compaction are excluded. Also excluded are materials used in the repair, construction, renovation or remodeling, or maintenance of part or all of any property whether on or off the residence property.

Section I – ConditionsInsurable Interest and Limit of LiabilityThe insurer is not liable for more than the amount of the insured’s insurable interest at the time of the loss, or for more than the applicable limit of liability. This condition applies even if there is more than one person with an insurable interest in the property.

DeductibleThe insurer will only make payment for the portion of any one loss that exceeds the deductible, subject to the limit of liability. If two or more deductibles under the policy apply to the loss, the highest deductible will apply.

Duties after a Loss The insurer has a duty to pay a loss unless the insured fails to comply with these duties, and that failure is prejudicial to the insurer. The duties include:

• Give prompt notice of a loss to the company or agent

• Notify the police if a theft loss occurs

• Notify the credit card, fund transfer card, or access device company



• Protect the property from further damage

• Cooperate with the insurer in the investigation of the loss

• Prepare an inventory of the damaged property

• When requested show the property, provide records and documents, and submit to an examination under oath

• Send a sworn, signed proof of loss, if requested

Loss Settlement Actual cash value (ACV): For personal property, awnings, carpeting, household appliances, outdoor equipment, structures that are not buildings, and grave markers and mausoleums, either the actual cash value or the cost to repair or replace, whichever is less, will be paid.

Replacement cost: For buildings covered under Coverages A and B, replacement cost will be paid without deduction for depreciation so long as the Coverage A amount of insurance is at least 80% of the replacement value of the dwelling.

If the amount of insurance is at least 80% of the replacement value, the amount paid will be the lesser of:

• The limit of liability on the declarations

• The replacement cost of that part of the building damaged with material of like kind and quality

• The amount actually spent to repair the damaged building

If the amount of insurance is less than 80% of the replacement value, the amount paid will be the greater of:

• The actual cash value on the part of the building damaged

• The proportion the total amount of insurance for the dwelling bears to 80% of the replacement cost of the building

Loss to a Pair or SetIn the case of a loss to a pair or set, the insurer will either repair or replace any part to restore the pair or set to its value before the loss, or pay the difference between the ACV of the property before and after the loss.

Appraisal If the insurer and insured cannot agree on the amount of the loss, either may demand an appraisal. After either party requests the appraisal, each party will choose a competent and impartial appraiser within 20 days. If the two appraisers can’t agree, they will choose an umpire who will make the final decision. If the appraisers can’t agree on the umpire, a judge in the court of record will rule. Each party will pay for its own appraiser and share equally the costs of the umpire and the appraisal.

Other Insurance and Service AgreementOther insurance: If a loss is covered by this policy and another policy or coverage, this policy will only pay the proportion of the loss that the limit of liability bears to the total amount of insurance covering the loss. Service Agreement: The insurance is excess over any amount payable under any service agreement. A service agreement means a service plan, property restoration plan, home warranty or other similar service warranty agreement.

Suit Against UsNo action can be taken against the insurer unless all terms of Section I have been fully complied with. Any action must be started within two years after the date of loss.



Our OptionIf the insurer gives the insured written notice within 30 days after the insured’s signed and sworn proof of loss is received, the insurer may repair or replace any part of the damaged property with material or property of like kind and quality.

Loss PaymentThe insurer will adjust all losses with the named insured and pay all claims to the insured or someone legally entitled to receive the payment. Payment will be made within 60 days after the insurer receives the insured’s proof of loss and reaches an agreement with the insured, a final judgment is entered, or an appraisal award is filed with the insurer.

Abandonment of PropertyThe insurer does not have to accept any property abandoned by the insured.

Mortgage ClauseIf a mortgagee is named in the policy, any Coverage A or B loss will be paid to the mortgagee and the named insured, as their interests may appear. If the insured’s claim is denied, the denial will not apply to a valid claim by the mortgagee. Subrogation will not impair the right of the mortgagee to recover the full amount of the mortgagee’s claim, if filed. If the insurer cancels or does not renew the insured’s policy, the mortgagee will be notified at least 10 days before the cancellation or nonrenewal date.

No Benefit to BaileeThe insurer does not recognize any assignment or grant any coverage that benefits a person or organization holding, storing, or moving property for a fee.

Recovered PropertyIf the insured or insurer recovers any property for which a claim was paid, each must notify the other. The insured has the option of keeping the recovered property or giving it to the insurer. If property is retained by the insured, the claim payment will be adjusted.

Volcanic Eruption PeriodOne or more volcanic eruptions that occur within a 72-hour period will be considered as one volcanic eruption.

Policy PeriodThis policy applies only to losses that occur during the policy period.

Concealment or FraudThe insurer will not provide any coverage if, whether before or after a loss, the insured has intentionally concealed or misrepresented any material fact or circumstance, engaged in fraudulent conduct, or made false statements relating to the insurance.

Loss Payable ClauseIf a loss payee is listed on the Declarations, the definition of insured is changed to include that loss payee with respect to that property. The loss payee will be notified if the insurer cancels or non-renews the policy.



Section I – Property EndorsementsNumerous endorsements are available under both the ISO and AAIS programs and insurers may offer many others of their own, including variations of the ISO and AAIS endorsements. The following endorsements are common to most insurers:

Trust Endorsement This endorsement allows the policy to be written in the name of the trust that is listed as the legal titleholder. (AAIS: The trust endorsement provides coverage for the trust as an additional insured rather than the named insured.)

Student Away at SchoolThe policy definition of “insured” includes students under the age of 24 (AAIS: under age 25) who are full-time students away at school. This endorsement provides coverage for those over the maximum age who were residents in the insured’s household and are now living away at school. It also covers non-relative residents under age 21.

Inflation Guard An inflation guard endorsement provides automatic increases in the dwelling coverage to keep pace with inflation and maintain adequate coverage to repair or replace the dwelling in the event of a major loss. The endorsement automatically increases the limits for Coverages A, B, C, and D based on a factor derived from a preferred, standard, construction cost index. It should be noted and specifically explained to insureds that the inflation guard endorsement does NOT guarantee that they will not become underinsured

Water Backup and Sump Discharge or Overflow Loss caused by flood, surface water, or water that backs up through a sewer or drain is usually excluded, as is spray from any of these. This endorsement provides limited coverage for water or water-borne material that backs up through sewers or drains, overflows from a foundation tile drain system, or water that overflows from within a sump or sump pump. Common limits are $5,000 with a $500 deductible. Because of the limitations in this coverage, the agent should be sure to discuss the availability of flood coverage.

Earthquake CoverageThis endorsement should be considered for purchase on every policy issued in any state where there is exposure to an earthquake. It covers loss under Coverages A, B, and C caused by earthquakes, including land shock waves or tremors before, during, or after an earthquake, and volcanic eruptions. All shock waves within 72 hours are usually considered a single quake. The deductible is a percentage of the amount of coverage applicable to damaged property and applies separately to different classes of property. Many policies do, however, provide coverage without endorsement for direct losses caused by fire, explosion, theft, or breakage of glass that occurs after an earth movement.

Other Structures on Residence Premises - Increased LimitsOther structures are covered under the homeowners policy for 10% of Coverage A. That amount, however, may not be enough to adequately cover one valuable structure or multiple structures. This endorsement will provide an additional amount of coverage for one or more described structures that has a value in excess of the automatic limit provided by the policy for Coverage B.

Specified Additional Amount of Insurance for Coverage AThis endorsement provides an additional 25% or 50% of insurance under Coverage A in the event of a loss. The insured must maintain dwelling insurance at full replacement value and report if any alterations are made that increase the dwelling’s replacement value by 5% or more.



Personal Property Replacement Cost Upgrading loss settlement for personal property from actual cash value to replacement cost is the purpose of this endorsement. The insured will receive the lesser of:

1. Replacement cost at the time of the loss

2. Full cost to repair

3. Coverage C limit

4. Special limit, if applicable

5. Limit that applies to any item separately described

Items not eligible for replacement cost coverage are antiques, fine arts, and similar property, collectibles, broken items, and obsolete articles.



1. How much is the total limit per loss provided by the additional coverage, Debris Removal, for the removal of insured trees felled by windstorm?a. $500b. $1,000c. $1,500d. $2,000

2. Damage to trees, plants, shrubs and lawns is limited to each of the following perils, EXCEPT: a. Windb. Firec. Lightningd. Explosion

3. How much is the total limit per loss for the unauthorized use or theft of the insured’s fund transfer card that is provided by the additional coverage for credit cards?a. $500b. $1,000c. $1,500d. $2,000

4. In addition to the Coverage C perils, the additional collapse coverage is covered if the direct physical loss was caused by the __________ decay and damage by insect or vermin,a. Apparentb. Hiddenc. Physicald. Weight of

5. Water damage means each of the following causes, EXCEPT:a. Tidal waterb. Water leaking through the foundationc. Water escaping a seawalld. Water caused by an explosion

6. which of the following is not excluded under the hO-3 Property exclusions?a. Insured neglects to preserve property after a covered claimb. Ensuing fire from a nuclear reaction lossc. Power failure that occurred away from the premisesd. Mudslide

7. which of the following is not a duty of the insured after a loss?a. Prompt notice of a loss to the company or agentb. Notify the access device company if there is a covered lossc. Protect the property from further damage d. Notify the police if a vandalism loss occurred

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8. As long as the amount of insurance on a dwelling is at least 80% of the total replacement cost value of the dwelling, the amount paid in the event of a covered loss will be the least of all of the following, EXCEPT:a. The limit of liability b. The replacement cost of that part of the building damaged with material of like kind and qualityc. The amount actually spent to repair the damaged building d. The market value of the like kind and quality property

9. If the appraisers hired by the insured and insurer do not agree on the value of damaged property the insured and insurer choose any umpire who will make the final decision. who will pay for the umpire’s services?a. Insurer and Insuredb. Umpirec. Insurer and the Appraisersd. Appraisers

10. what is the common limit for a loss caused by water that overflows from within a sump pump under the water Backup and Sump Discharge or Overflow endorsement?a. $500b. $1,000c. $2,500d. $5,000

11. The endorsement, Increased Limit—Other Structures, provides coverage for which of the following:a. All of the detached structures on the propertyb. An “other structure” used for business that requires increased limitsc. Additional amount of coverage for a described structure d. An additional 10% coverage for one structure

12. The Personal Property Replacement Cost endorsement upgrades the coverage settlement for personal property from actual cash value to which of the following methods of valuation?a. Scheduled valueb. Functional valuec. Stated valued. Replacement cost value



Chapter 6

Liability Coverages E and FThis chapter will review the liability additional coverages, exclusions, conditions, and endorsements. Also included are several endorsements that apply to business exposures.

Additional Coverages (AAIS: Incidental Coverages)Claim ExpensesThe insurer will pay any expenses it incurs and costs taxed against the insured in any suit defended by the insurer. The insurer will also pay premiums on bonds for any suit it defends up to the Coverage E limit of liability, and interest on the entire judgment which accrues after entry of the judgment, up to the liability limit. If the insured incurs expenses at the insurer’s request for assisting in the investigation or defense of a claim, including loss of earnings up to $250 per day, the insurer will pay what is reasonable.

First Aid ExpensesThe insurer will pay the insured’s expenses for first aid to others for bodily injury covered under this policy.

Damage to Property of OthersThis coverage is referred to as the “Good Neighbor Coverage.” It pays for minor property damage claims without a need to prove the insured’s negligence other than that the loss was caused by an insured. For example, if a lawn chair is tossed by the wind into a neighbor’s car, this coverage will pay for damage to the car, up to $1,000 per occurrence.

Limitations apply:

• Intentional acts of an insured 13 years of age or older are excluded. • The coverage cannot be used in place of Section I-Property Coverage. • Coverage does not extend to the ownership, maintenance, or use of aircraft, watercraft, or motor

vehicles or all other motorized land conveyances, except motorized land conveyances designed for use off of public roads and not subject to registration, such as the neighbor’s riding lawn mower.

• No coverage extends to property owned by an insured, rented to a tenant of an insured, or owned by a resident of the insured’s household.

Example: Mary and John were invited to a dinner party at a friend’s house. After dinner, Mary was drying dishes, and she accidently dropped and broke her friend’s very expensive crystal bowl. Mary is devastated and she quickly volunteers to buy her friend another (not knowing the cost at the time). When Mary learns the bowl costs $1,200 to replace, she files a claim under her homeowners policy. Will this coverage pay the claim?

Answer: Yes. But unfortunately for Mary, the replacement cost of the bowl is $1,200, and her policy limit is $1,000, so she will have to pay $200 out of pocket.

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53ChAPTEr 6: LIABILITY COvErAGES E AND F

Loss AssessmentThe insurer will pay up to $1,000 per loss for the insured’s share of a loss assessment charged to the insured by a corporation or property association. The assessment must be charged for bodily injury or property damage covered under the insured’s policy, or the liability for an act of a director, officer or trustee elected by the association members, and does not accept any income from the position.

Assessments charged by any governmental body are excluded.

Section II – ExclusionsMotor Vehicle LiabilityA motor vehicle should be insured under the personal auto policy. Exceptions to this exclusion include motor vehicles in dead storage on an insured location, used solely to service the residence, designed to assist the handicapped; non-owned vehicles designed for recreational use off public roads, such as a toy vehicle for children under age 7; and owned motorized golf carts within the boundaries of a golfing facility or a private residential community and authorized by the property association.

Watercraft LiabilityWatercraft used for racing or other speed competitions, rented to others, used to carry people or cargo for a fee, and used for business purpose, are excluded.

watercraft is covered if stored, or if it is a sailboat (with or without auxiliary power) less than 26 feet, or non-owned and over 26 feet. An inboard or inboard-outdrive motor boat up to 50hp, or a non-owned inboard or inboard-outdrive motor boat more than 50hp, is covered. Also covered are outboards with 25 total horsepower or less or a non-owned outboard with over 25hp.

Aircraft LiabilityThe policy does not cover aircraft liability.

Hovercraft LiabilityThe policy does not cover hovercraft liability.

Expected or Intended InjuryBodily injury or property damage that is expected or intended by an insured is not covered. Bodily injury or property damage resulting from the use of reasonable force by an insured to protect persons or property is covered.

BusinessBodily injury or property damage arising out of business conducted on an insured location is not covered. An act or omission involving service or duties rendered, promised, owed, or implied as a result of the business is also excluded.

The rental or holding for rental of an insured location is covered as long as it is intended as a residence for no more than two roomers or boarders, used occasionally as a residence, or used, in part, as an office, school, studio, or private garage.

An insured under the age of 21 involved in a part-time or occasional self-employed business with no employees is covered.

Professional ServicesNo liability coverage is provided for bodily injury or property damage arising out of the rendering of, or failure to render, professional services.



Insured’s Premises Not an Insured Location Premises owned or rented by the insured that are not an insured location are excluded.

War Undeclared war, civil war, insurrection, rebellion, revolution, warlike acts by a military force or personnel including discharge of a nuclear weapon, and destruction, seizure or use for a military purpose are excluded.

Communicable DiseaseThis exclusion was added in response to the increase in lawsuits alleging negligent transmission of communicable diseases. It suggests only person-to-person transmission by direct physical contact, and therefore does not cover contagious diseases spread by airborne particles, such as measles, or diseases spread through food contamination, such as botulism.

Sexual Molestation, Corporal Punishment or Physical or Mental AbuseAs a matter of public policy, there is no coverage for bodily injury or property damage arising out of sexual molestation, corporal punishment, or physical or mental abuse. Corporal punishment is available for teachers by endorsement.

Controlled SubstanceBodily injury and property damage arising out of the use, sale, manufacture, delivery, transfer, or possession of drugs that meet the United States Code definition of controlled substance. Narcotics, hallucinogens, and psychotropic drugs meet the definition, whereas alcohol and nicotine do not. An exception exists for the legitimate use of prescription drugs by a person following the lawful orders of a licensed health care professional.

Coverage E – Personal Liability ExclusionsLoss Assessment Loss assessment charged against the insured pertaining to any association, corporation, or community of property owners is excluded except as provided under Additional Coverages.

Contracts or AgreementsNo coverage is provided for liability assumed under any contract or agreement entered into by an insured unless it relates directly to the ownership, maintenance or use of an insured location, or where the liability of others is assumed by the insured prior to an occurrence.

Property Damage to Owned or Rented Property Liability coverage is excluded for property damage to property owned by, rented to, occupied or used by, or in the care of an insured. Property damage to property rented to, occupied or used by or in the care of an insured caused by fire, smoke or explosion is covered.

Workers’ Compensation Bodily injury is excluded for persons eligible to receive any benefits provided under a workers’ compensation law, non-occupational disability law, or occupational disease law.

Nuclear Energy LiabilityCoverage is excluded if the insured is also an insured under the liability policies issued by the Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters, or Nuclear Insurance Association of Canada.



Bodily Injury to an Insured Bodily injury to the named insured or any insured (as defined in the policy) is not covered. Also excluded is any claim made or suit brought against any insured to repay or share damages with another person who may be obligated to pay bodily injury damages to an insured.

Coverage F – Medical Payments to Others ExclusionsResidence EmployeeMedical payments to residence employees are excluded if the bodily injury occurs off the residence premises and does not arise in the course of employment.

Workers’ CompensationExcluded are medical payments to any person eligible to receive benefits under workers’ compensation law, non-occupational disability law, or occupational disease law.

Nuclear EnergyMedical payments for bodily injury due to nuclear reaction, radiation, or radioactive contamination are excluded.

ResidentsAny person who regularly resides on the insured location is excluded from coverage under Medical Payments to Others.

Section II – ConditionsLimit of LiabilityCoverage E’s total limit of liability applies to all damages resulting from any one occurrence, and is the same regardless of the number of insureds, claims made, or persons injured.

Coverage F’s total limit of liability for bodily injury applies to one person as a result of one accident.

Severability of InsuranceThe insurance applies separately to each insured, but does not increase the limit of liability for one occurrence. Severability guarantees that the policy will not represent one insured against another insured.

Duties after OccurrenceThe insured must perform the following duties in order for the insurer to provide coverage:

• Give written notice of a claim including the time, place, witnesses, claimants, and circumstances of the occurrence

• Cooperate with the insurer in the investigation, settlement, or defense• Promptly forward any notice, summons, or other process relating to the occurrence• Submit a sworn statement of loss and show damaged property to the insurer within 60 days• Avoid voluntarily payments, assuming obligations, or incurring expenses other than first aid

Duties of an Injured Person (Coverage F – Medical Payments to Others)The injured person, or someone acting for the injured person, must give the insurer written proof of loss and authorize the insurer to obtain medical reports and records. If necessary, the injured person must submit to a physical exam at the insurer’s request.



Payment of Claim (Coverage F – Medical Payments to Others)Payment under Coverage F is not an admission of liability by the insured or insurer.

Suit Against UsNo action may be taken against the insurer unless all terms of the policy have been complied with.

Bankruptcy of an InsuredThe insured’s bankruptcy or insolvency does not relieve the insurer of its obligations under the policy.

Other Insurance This coverage is excess over any other insurance that can be collected unless the other insurance specifically provides coverage as “excess” over the policy limits.

Policy PeriodThe policy will only cover losses that happen during the policy period.

Concealment or FraudThe policy is void if the insured, either before or after a loss, intentionally concealed or misrepresented any material fact or circumstance, engaged in fraudulent conduct, or made any false statements relating to the insurance.

Sections I and II – ConditionsLiberalization ClauseIf the insurer liberalizes the coverage under the issued edition of the policy during the policy period, and that liberalization does not cost an additional premium, the policy automatically has the more liberal coverage.

Waiver or Change of Policy ProvisionsAll changes must be agreed to by the insurer in writing.

CancellationBy the insured: The insured may cancel or terminate the policy by returning it to the insurer or by writing the insurer a letter stating the date the cancellation is to take effect. If the insured cancels, the refund may be short-rate if the laws of the state allow such cancellation.

By the insurer: The conditions for company cancellation and the required number of days written notice vary by state and insurer. In no case may the company terminate coverage by giving less notice than is required by the laws in the state where the insured premises are located. The insured is entitled to an unearned premium refund.

The insurer may cancel for nonpayment of premium by giving 10 days’ written notice to the insured.

If the policy has been in effect for less than 60 days and is not a renewal, the insurer may cancel for any reason as long as 10 days’ written notice is given to the insured.

If the policy has been in effect for 60 days or more, or is a renewal, the insurer may only cancel and give at least 30 days’ written notice to the insured:

• If there has been fraud or a material misrepresentation of fact which would have prevented the insurer from issuing the policy to begin with

• For nonpayment of premium• If the risk has changed substantially since the policy was issued



Nonrenewal30 days’ written notice to the insured must be given if the insurer wants to non-renew coverage.

AssignmentAssignment of the policy to another person will not be valid unless the insurer gives written consent. Generally, assignment is not allowed. For instance, a new owner of the residence cannot take over the homeowners policy that was issued to the owner of the residence premises prior to the sale. The new owner’s risk must be underwritten and a new policy purchased.

SubrogationThe insured may waive his or her rights to recover against a third party before the loss as long as it is in writing. If rights to recover have not been waived by the insured, the insurance company has the right to initiate possible subrogation against a third party for an insured loss to the extent that indemnity has been paid.

DeathIf the resident named insured dies, the legal representative will be an insured under the policy, but only with respect to the covered premises and property.

Business EndorsementsBusiness PursuitsThis endorsement modifies the Part II—Liability Coverage Only. It covers the insured’s liability due to business activities while working as an employee. Examples of clients needing this coverage are salespeople, teachers, messengers, collectors, and clerical workers.

If the insured is the owner of the business, has a partnership interest in the business, or has financial control of the business, this endorsement does not apply.

Permitted Incidental Occupancies – Residence Premises The endorsement is used when an insured owns a business and conducts it at the residence premises. It increases the coverage for business furniture, supplies, and equipment from $2,500 to the Coverage C limit. It also removes the Coverage B exclusion for other structures used in business and removes the “business” exclusion for the necessary and incidental use of the residence premises to conduct the business named in the schedule.

Home-based BusinessThis endorsement provides coverage for both business property and business liability for home businesses, including those owned by the named insured, a partnership, joint venture, or organization comprised of the named insured and resident relatives.

Property coverage includes business property, property of others in the insured’s care, and business property leased by the insured under a business contract or agreement. Coverage is provided for valuable papers, records, accounts receivables, time element coverages. (AAIS: insures a bed and breakfast including guests’ personal property, related structures, and spoilage of perishable stock.) Liability for premises operations, products, advertising injury, and personal injury are also covered.

Home Day Care Coverage EndorsementProperty and liability coverage for a home day care business is provided in this endorsement; however, there is no coverage for sexual molestation. The endorsement imposes a policy year aggregate limit for liability and medical payments combined for covered losses. Most home day care providers are required by law to be licensed or certified; as a result, not all carriers will use this endorsement.



Umbrella Liability CoverageUmbrella liability coverage is excess personal liability insurance that provides higher limits and broader liability coverage when the underlying or primary coverage is not adequate, has been exhausted, or is excess over the underlying or primary coverages.

Agents typically do not have binding authority when writing Umbrella business, especially coverage with limits exceeding $1,000,000. Many insurers offer Umbrella policies with premiums that range between $200 to $500 for the first $1,000,000 of coverage, and a smaller charge per million for higher limits up to $5,000,000.

This coverage may be purchased as a separate policy or an endorsement to the homeowners policy. Some insurers’ Umbrella policies have relatively simple provisions, while others can contain complex definitions, exclusions, and conditions. Umbrella policies have underlying coverage requirements, such as:

Typical Underlying Limit Minimum RequirementsAuto Liability 250/500/100Personal Liability $300,000Watercraft Liability $300,000

The Umbrella also provides coverage for causes of loss that may not be covered in a standard automobile or homeowners policy, such as:

• Libel or slander

• Invasion of privacy

• Defamation of character

• False arrest

• Malicious prosecution

• Wrongful eviction or entry

Umbrella coverage only makes payment after the underlying primary policies exhaust their limits. Umbrellas include a self-insured retention (SIr) because they are not intended to be first-dollar coverage. This limit must be absorbed by the insured before the Umbrella pays when it applies to a loss that isn’t covered by an underlying policy.

Liability insurance, including Umbrella liability, covers the client anywhere in the world and is relatively inexpensive when compared to other types of liability insurance. No one can predict the financial repercussions of judgments, legal fees, or awards, and this policy is not just appropriate for the wealthy. It is protection that every client should have the opportunity to consider or evaluate. Many estate planners recommend, if not insist, that their clients acquire Umbrella coverage.



1. If the insured incurs expenses at the insurer’s request for assisting in the investigation or defense of a claim, the insurer will pay loss of earnings up to $ ______ per day.a. $100b. $250c. $500d. $1,000

2. Under Damage to Property of Others in Section II, up to how much will the insurer pay per occurrence?a. $100b. $250c. $500d. $1,000

3. while an intentional act is generally excluded, an insured under the age of _____ is covered under the Section II—Damage to Property of Others coverage.a. 9b. 11c. 13d. 15

4. A motor vehicle should be insured under the personal auto policy. However, which of the following is an exception and is covered under the homeowners policy?a. Owned vehicle parked in the garage for the winterb. A toy vehicle for children under age 12c. A rented motorized golf cart used on a golfing facilityd. A vehicle designed to assist the handicapped

5. watercraft liability is excluded for Section II coverages, except for which of the following watercraft? a. Outboards with 25 total horsepower or less b. Non-owned outboard with over 50hp c. Inboard or inboard-outdrive motor boat up to 25hp d. Inboard-outdrive motor boat more than 100hp

6. Business liability is excluded under the homeowners policy. Under what age would an exception be made for an insured who is involved in a part-time business?a. 15b. 18c. 21d. 23

7. The insured must perform duties after an occurrence in order for the insurer to provide coverage. Which of the following is not a required duty?a. Promptly forward any noticeb. Submit a sworn statement of lossc. Assume obligations as neededd. Cooperate with the insurer

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8. If the insurer adds free additional coverage to the policy edition during the insured’s policy period or within 60 days prior, the insured automatically has the better coverage. This is which of the following clauses? a. Liberalizationb. Assignmentc. Severabilityd. Automatic

9. The endorsement, Permitted Incidental Occupancies—residence Premises, covers the liability of the professional services of each of the following occupations, EXCEPT:a. Music teacherb. Accounting partner c. Photography studiod. Beautician

10. Which of the following endorsements provides business liability for premises operations, products, advertising injury, and personal injury?a. Umbrella Liabilityb. Home day carec. Home-based businessd. Homeowners Business Liability

11. The Umbrella Liability policy provides all of the following liability, EXCEPT: a. When the underlying or primary coverage is not adequate b. When underlying liability has been exhaustedc. As excess over the underlying or primary coverages d. As primary when the insured qualifies

12. In addition to providing excess or additional coverage, the Umbrella policy also provides coverage that it is excluded in the underlying policy. which of the following is not one of these coverages? a. Slanderb. Identity assumptionc. Malicious prosecutiond. Defamation of character


Chapter 7

Underwriting and ClaimsUnderwriting

Claims DatabasesClaims databases are used when a client applies for insurance and the insurer needs to be able to properly assess the risk of loss. Insurers use these databases to review the applicant’s claim history. Insurers use loss histories as a primary underwriting and rating tool.

There are two major property and casualty claim databases; both are referred to as CLUE reports:

CLUE: Comprehensive Loss Underwriting Exchange

A-PLUS: Automated Property Loss Underwriting System.

Data is compiled for several years, depending on state law. The database contains information about property losses supplied by insurers who write about 90% of all United States homeowners policies. CLUE contains an estimated 40,000,000 claim records on property in all 50 states and covers everything from water damage to slip and fall claims.

CLUE reports are used more to underwrite and rate new policies than to re-rate existing business. Underwriters and actuaries can look to their own databases at renewal time for existing business.

Credit Scoring Insurers use a prospective client’s credit history or credit score to determine insurance eligibility and premiums. Consumer groups claim that credit scoring is discriminatory, while insurers insist it is a reliable indication of claim frequency. Insurers point out that credit scoring provides an applicant’s bill-paying history which correlates with the tendency to file claims.

Legislation has been passed in a number of states requiring insurers to provide an explanation when coverage is cancelled or non-renewed based on a credit score and prohibiting insurers from using credit information as the sole basis for underwriting.

Residual or Assigned Risk Market All states and the District of Columbia use special systems, pools, or plans to guarantee that property owners have available insurance marketplaces if they are rejected by, or deemed too risky, in the private or voluntary underwriting market. Reasons for declination of coverage in the standard insurance market include poor loss history, not meeting underwriting requirements, and proximity to the seacoast.

Residual or assigned risk is referred to in the insurance industry as the market where high risk applicants can be written, or the market of “last resort.” Premiums are usually higher than they are in the standard market and insurers pool the profits and losses generated by assigned risk business. residual market programs are rarely self-sufficient, and insurers are assessed to make up the difference, with those additional costs typically passed on to consumers in the premium structure.

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The largest of the residual insurance pools, known as the FAIR Plan (Fair Access to Insurance Requirements), was created in response to the increase of insurance costs and short supply of coverage in the homeowners market.

Servicing the Homeowner Market In servicing the homeowner market, the professional agent should consider, research, and obtain information or stock items such as brochures and pamphlets to provide the following items for current and future clients:

• A personal property or contents inventory • How to reduce humidity and protect the home from mold • Safety procedures after a flood or other water damage • Home security• Correction of construction or design weaknesses

ClaimsFiling a ClaimThe homeowners policy is a contract between the insurer and the insured. The policy specifies duties that must be followed by the insured during the claim process:

• Give prompt or immediate notice of any claim to the insurer or agent• Notify the police or local authority of any crime, and obtain a copy of the report• Make needed temporary repairs to protect the property from further damage• Prepare an inventory or documentation of damaged property, and retain the property for the

adjuster to inspect• Keep records and receipts of repairs and additional necessary expenditures• Promptly fill out and return the necessary claim forms• work with the adjuster to complete and finalize the loss settlement

Adjuster’s RoleOnce the insured contacts the claim department and a claim is filed, it is likely that an adjuster will be assigned to investigate, negotiate, and settle the claim. The insurance policy is based on principles of utmost good faith, and the adjuster’s conduct, work ethic, and specific claims handling activities must support those principles. The adjuster’s goal is to make sure the contractual obligations of all parties are met and the claim is handled quickly and fairly. At the time of a loss, the insured views the adjuster as the insurance company.

There are three types of adjusters:

• A staff adjuster is a salaried employee of the insurance company and handles that insurer’s claims. Generally there are staff property adjusters and staff liability adjusters, each expert in the handling of property or liability claims.

• Independent adjusters are licensed adjusters who are not directly employed by an insurer but instead represent insurers. Independent adjusters can be self-employed or work for independent claims organizations. Independent adjusters are used when special expertise is needed such as a catastrophe.

• Public adjusters represent the policyholder, not the insurer, to protect the insured’s interest. The public adjuster prepares the claim and negotiates the settlement with the staff or independent adjuster.


63CHAPTER 7: UNDERWRITING AND CLAIMS

The staff or independent claims adjuster will handle a claim by following several steps:

1. Determine if coverage applies.2. Investigate the claim by contacting the parties involved, including witnesses, claimants, and the

insured. Investigation tools include recorded statements, police reports, and medical or autopsy reports.

3. Document the claim file with ongoing details of the results of the claim handling as the claim file can be used as evidence in court.

4. Evaluate the claim to determine liability using medical reports and physician diagnoses, and appraisals to determine the extent of property damage.

5. Negotiate the final settlement.6. Settle the claim and effectively communicate the results.

Claim Settlement – PropertyValuation means the estimate of the value of property and is a major role of the property adjuster. The adjuster will determine the value of the damaged property based on the valuation clause specified in the policy contract or endorsement. The adjuster will use the valuation clause, policy limits, and deductibles to determine the claim amount.

There are several valuation methods:

• Replacement Value is the cost to repair or replace property with property of like kind and quality at current prices. Depreciation is not considered.

Example: If the cost to replace a damaged roof is $10,000 today, using exactly the same materials, that is the value the insured will receive to replace the roof.

• Actual Cash Value is the basic concept of valuation and reinforces the principle of indemnity. The actual cash value of property is its replacement value minus applicable depreciation.

Example: A 10-year old roof is damaged in a windstorm. It will cost $10,000 to replace the roof today; however, the roof value has depreciated 5% per year. The actual cash value is today’s replacement cost of $10,000 minus the depreciation of 5% times 10 years, or 50%. The actual cash value of the roof is $5,000, which is what the insured will receive to replace the roof.

• Functional Replacement Value allows the insurer to replace damaged property with a current functional equivalent or with new property of unlike kind and quality that performs the same function. Depreciation of the property is not considered.

Example: A water pipe leak damages the crown molding in a 100-year-old Victorian home. The functional replacement cost will be the replacement value of the damage with today’s version of crown molding.

• Market Value is the amount a willing buyer will pay to a willing seller.

Example: John is selling his home, which overlooks a lake. Although the home real estate appraisal value is $400,000 and its replacement value is $350,000, an eager buyer has offered to pay $500,000 for the house. $500,000 is the market value of the home.

• Agreed Value is agreed upon by the insured and the insurer at the policy inception. The value is usually determined by an expert appraisal and the agreed value must be updated annually. Regardless of the actual value at the time of loss, the agreed value is paid.

Example: A vintage 1948 car is valued at $40,000, while another 1948 car might be valued at $400. If the vintage car is totaled, the insurer will pay the agreed value of $40,000.



• A Valued Policy is one governed by state law. When loss occurs to property insured by a valued policy, the insurer must pay the amount of insurance designated on the declarations, regardless of the property’s value at the time of loss.

Example: The insured insures his home under a valued policy for $200,000. A fire destroys the home and its replacement value at the time of loss is $150,000. The insurer must pay the insured $200,000 because of the valued policy laws in the state.

• Stated Amount is the value the insured states an item is worth. In the event of a loss, the stated amount is the maximum the insurer will pay.

Example: An insured believes a statue is worth $400 and insures the statue at the stated amount of $400. The statue is stolen, and the adjuster is able to replace it for $200. The claim amount for the statue will be $200.

AppraisalAppraisal means the act of determining the monetary value of real or personal property. Experts, or those certified as experts, partner with the property adjuster to estimate the value of damaged property. This method is typically used on first party property claims.

If the insured does not agree with the property valuation, the insured has a right to obtain the services of an appraiser at his own cost. The insurer’s appraiser and the insured’s appraiser will attempt to agree on the property value. If successful, the claim payment is determined. If they do not agree, an independent umpire is hired to make the final decision. The insured and insurer will split the costs of the umpire and the expenses of the appraisal equally.

Claim Settlement – LiabilityThe last step in the loss adjustment process, settlement, involves applying the policy provisions and recognizing the burden of proof that must establish the appropriate outcome. Once coverage is established, the insured’s liability or negligence and any resulting damage must be established.

was the insured negligent? was the claimant negligent? To what degree was each party negligent? Three classifications of liability result from this investigation:

• Liability is clear – If no defense to the insured’s negligent actions is established, the liability is clear. If a settlement can be reached, these cases can be settled quickly.

• Liability is questionable – There are situations when the claimant’s case appears legitimate and the best outcome for questionable liability is compromise.

• No Liability – When the investigation indicates the insured was not negligent, there is no liability and the claim can be rejected.

Subrogation Subrogation means the transfer of the insured’s rights of recovery from another party to the insurer. It is based on the concept of fairness – the responsible party should pay.

If the insurer makes payment under the policy, the insurer will have the right to recover such payment from any liable party. The insured cannot impede the insurer’s right to recover. Also, if the insured or any other party to whom the insurer has made payment subsequently recovers payment or damages from another party, the insured or that party is obligated to hold the funds and reimburse the insurer for payments made under the policy.

The insurer can subrogate against the insured if the insurer later determines after a claim is paid that the insured’s action was fraudulent or deceitful.


65CHAPTER 7: UNDERWRITING AND CLAIMS

Example: The insured’s garage was vandalized and the insurer paid the insured for the damage. The insurer then discovered the insured vandalized his own garage and blamed the neighbor. The insurer can subrogate against the insured for half the claim amount as he was guilty of fraud. Mrs. Insured, as the innocent co-insured, is entitled to keep her half of the claim.

Subrogation often occurs between two insurance companies that must agree about which party to the loss was responsible for the loss—or most responsible for it.

Example: The joint wall between two townhouses was damaged by a negligent fire. The townhouses were insured by different insurers and each insured claimed damage under their own homeowners policies. The insurers each paid their own insured, and then were entitled to recover from the other insurer once it was determined who was negligent. Once the fire department determined fault, the successful insurer was able to subrogate against the other insurer.

Subrogation can also occur against a third-party.

Example: An insured’s garage was vandalized and his insurer paid damages for the loss. The insurer can then attempt collection for the paid damages from the person responsible for the vandalism.

Course SummaryA year has passed since the Johnsons woke to a devastating claim situation. They learned quite a lot during that experience. For example, Coverage D paid loss of use expenses as they stayed in a hotel while their house was being repaired. They also learned that the water damage was covered because the falling tree, which was struck by the covered peril of lightning, fell on the roof and outside walls.

The Johnsons have referred several friends and family to Tom Goodsense as he is a very professional and knowledgeable agent. In fact, just recently Mike, the Johnsons’ 18-year-old son, went off to college with many personal possessions. Tom confirmed for Jack and Marie that not only will their homeowners policy protect Mike’s personal property at college, it will also cover his personal liability.

Understanding the homeowners policy is important for policyholders as well as insurance agents.

The insurance professional must serve his client well with a homeowners policy providing adequate coverage at a competitive premium. The insurance professional must work with clients to review the homeowners policy regularly, including after major purchases, home alterations, improvements, or safety features that affect the coverage limits. If a claim occurs, both the agent and the policyholder will know that their best interests are the insurer’s priority.



1. Which of the following is a primary underwriting and rating tool used by insurers to evaluate loss histories?a. CLAIMb. FAIRc. CLUEd. LOSS

2. which of the following is the reason credit scoring is a useful underwriting tool for property insurers?a. Credit scores indicates credit worthinessb. Bill-paying history will determine which payment plan will work best for the insuredc. Credit scores can be used by claims to validate claim amountsd. Bill-paying history correlates with the tendency to file claims

3. which of the following plans is the largest residual homeowner insurance pool?a. INS b. BESTc. FAIR d. ADB

4. The policy includes duties that must be followed by the insured during the claim process. Which of the following is not one of those duties?a. Forward records and receipts of repairs and additional necessary expendituresb. Give prompt or immediate notice of any claim to the insurer or agentc. Make needed temporary repairs to protect the property from further damaged. Notify the police or local authority of any crime, and obtain a copy of the report

5. The insurance adjuster is assigned to investigate, ____________, and settle a claim.a. Analyzeb. Negotiatec. Promised. Compromise

6. which of the following adjusters represents one or more insurance companies?a. Staffb. Independentc. Publicd. Catastrophe

7. which of the following adjusters represents the insured?a. Staffb. Independentc. Publicd. Catastrophe

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8. which of the following is a step the independent adjuster must take in completing a claim assignment?a. Determine if coverage applies b. Take the initial claim report c. Take depositions from the claimant and witnessesd. Approve settlement amounts

9. A 5-year-old roof with a 10-year life span can be replaced for $20,000 today. With a depreciation value of 5% per year, what is the actual cash value of the roof?a. $5,000b. $8,000c. $10,000d. $15,000

10. A 1949 classic Chevrolet worth $60,000 is insured under an agreed value policy. The market value of another 1949 Chevrolet is $6,000 and the book depreciation value is 90%. How much will the agreed value policy insure the car? a. $5,400b. $6,000c. $54,000d. $60,000

11. An insured bought a painting at an auction 5 years ago and insured it for $12,000 under a valued policy. The painting was stolen and a similar painting was located, valued at $8,000. The depreciation of a painting is 10% per year. how much will the insured receive from the insurance adjuster for this claim?a. $12,000b. $8,000c. $6,000d. $4,000

12. which of the following is the transfer of the insured’s rights of recovery from another party to the insurer?a. Assignmentb. Subrogationc. Transferenced. Recovery



Review Questions Answer KeyChapter 11. C After a storm the insurance company will pay for lodging the night of the storm damage and for a

damage restoration company to come out immediately to stop the damage from continuing with a temporary roof and remove the damaged materials and dry out the water-soaked interior.

2. D The Standard Fire Policy included four parts including the Declarations, Agreements, Conditions, and Exclusions. Any additional coverages might have been added by endorsement to the standard policy.

3. B Most losses under the homeowners policy arise from loss to property. 4. A While the actual amounts allocated to each component vary by line of business, these amounts are

based on actuarial analysis and statistical assumptions along with historical data. 5. B An insurance pool is designed to redistribute actual and potential losses by spreading the risk among

all insureds. 6. C The principle of the Law of Large Numbers states that the larger the number of insureds

independently exposed to a loss, the greater the probability that the actual loss experience will equal the expected loss experience.

7. D Homeowners insurance is intended to return the home and possessions to the same condition they were in prior to a loss (the principal of indemnity).

8. A The calculation of the number of claims per 100 policies identifies the frequency of loss. 9. C One deductible amount is chosen by the insurer or by the rating organization the “base” deductible,

and other deductibles are typically calculated as a surcharge or credit amount from the base deductible.

10. D Other requirements of an insurance agent is to be prepared to answer all questions, continually be educated, educate the client, and understand underwriting rules, company policy forms, checklists, letters, and rating strategies.

11. D Errors and Omissions Coverage is available from an insurance broker or agent who specializes in professional liability insurance. This policy will protect an agent from claims, even baseless claims, for professional negligence. It also covers the court costs and any judgments up to the policy amount.

12. D The essential agency operational areas also include general representations, binders, orders, or both, policy endorsements, renewals, cancellations, and office procedures and management.

Chapter 21. B Considered ‘insureds” are children under age 24 of the named insured who are temporarily away from

home attending college and still considered a dependent of the named insured.2. D An occurrence is an accidental, unintended happening and consequence of an intended cause resulting

in bodily injury or property damage during the policy period. 3. A A vacant dwelling is considered neither inhabited nor furnished. Some insurers will no longer write

coverage for vacant premises. An unoccupied dwelling is furnished but not currently inhabited and not considered vacant.

4. D To qualify for a homeowners policy, other than a tenant or condominium policy, the one- to four-family dwelling must be owner occupied and used for residential purposes.

5. A The non-resident owner of a two-family dwelling needs a Dwelling Policy. 6 C An owner of a condominium or cooperative unit is eligible for the hO-6 condominium unit policy.

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Review Questions Answer Key7. B Common law has and continues to define the terms that are not specifically defined in the policy, such

as fire. “Common law” means unwritten law and developed primarily from judicial case decisions which are based on customs or previous case decisions.

8. C A hostile fire burns somewhere not intended. A friendly fire is contained in its intended location, such as a fire within a fireplace.

9. D A “morale” hazard means the state of mind or attitude of a person increases the chance of loss. The person doesn’t worry about a potential loss and may take fewer precautions, like leaving the front door unlocked.

10. A Indirect losses, such as a hole in the roof or water damage caused by the firefighters, are covered.11. B Damage caused by attempted theft is covered. The theft peril does not cover theft from that part of

the residence that is rented to others. Property, such as trailers, campers, watercraft when away from the residence premises, is not covered. Loss of property at another residence owned by the insured, when the insured is not there, is not covered.

12. D Damage from the weight of snow, ice, sleet is covered when the weight causes damage to a building or property contained in a building.

Chapter 31. C Examples of attached covered items include built-in cabinets and dishwashers, appliances, plumbing,

heating, and permanently installed air-conditioning systems, electrical wiring, wall-to-wall carpeting and fences if they are attached directly to the dwelling.

2. A Coverage A also provides no coverage for flood, earthquake, wear and tear, and neglect.3. B Coverage B provides coverage for detached structures on the residence premises away from the

dwelling by clear space or attached to the ground, such as garages, sheds, gazebos, and an in-ground swimming pool. The above-ground swimming pool is not “attached” to the ground.

4. A Clearly underinsurance of Coverage B can cause problems. The Coverage B amount can be increased if all the “other structures” total more than the standard amount of 10% of Coverage A.

5. D The standard amount of Coverage C is 50% of Coverage A.6 B The limit for personal property owned or used by an insured and located in a self-storage facility is

10% of Coverage C, or $1,000, whichever is greater. If the insured has moved out of the residence due to repairs, renovations, or rebuilding, this limit doesn’t apply. The limit also does not apply if the property is usually located in an insured’s residence other than the residence premises.

7. D $1,500 is the limit on watercraft including trailers, equipment, and outboard motors for any one loss.8. B Most homeowners policies do not provide coverage for motorized types of vehicles unless they are

unlicensed and used only on the owner’s premises. A garden tractor that the insured uses to mow his lawn and to haul materials around the residence property is covered.

9. C Coverage D includes Additional Living Expense, Fair Rental Value, and Civil Authority Prohibits Use.

10. C Additional living expenses are typically those living expenses over and above the insured’s normal living expenses which arise from a covered loss. These would be increased or additional living expenses needed because the insured is not able to live in the dwelling or use a structure while repairs or reconstruction are in process.

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Review Questions Answer Key11. C Coverage E provides bodily injury or property damage to others caused by negligence of an

insured, and related claims expenses such as premiums for bonds, lost wages, and interest incurred in settlements or judgments. Coverage F covers medical payments to others which do not require negligence on the part of the insured.

12. D The medical payments to others expenses must have incurred or been medically determined within three years from the date of the occurrence. The end of the three years would correlate in some states with the date resulting from the statute of limitations.

Chapter 41. C Homeowners policies can cover not only owner-occupied homeowners, but condominium owners and

tenants as well. 2. B The hO-6 is for those who own and occupy condominiums. The hO-4 form is for those who rent

apartments, condominiums, or dwellings from others. 3. A while hO-2 dwelling losses will be settled on a replacement cost basis, personal property losses are

subject to ACV valuation.4. D The hO-3 is an All risk or Open Perils policy, i.e. it protects the dwelling and other structures

coverages against all perils except those specifically excluded in the policy. The insuring agreement reads “We insure against direct physical loss to property described in Coverages A and B.”

5. B Sump pumps, roof drains, gutters and downspouts and similar equipment are covered.6 A Like the hO-2, hO-3 dwelling losses will be settled on a replacement cost basis, but personal

property losses are subject to ACV valuation. Endorsements are available to upgrade both the Coverage C perils from named peril to open peril, and the loss settlement from ACV to replacement cost.

7. D Open perils coverage is provided for both the hO-5 dwelling and personal property. The excluded perils for the hO-3 Coverages A and B are the same for the hO-5 Coverages A, B, and C.

8. B Sinking, swamping or stranding of watercraft and breakage are also excluded, however, coverage applies if the breakage is due to a named peril in the hO-3 Coverage C.

9. C The hO-8 may suit the needs of those homeowners who own older and very ornate homes or those homes located in declining neighborhoods where the replacement value far exceeds the market value.

10. B renters insurance provides similar coverages, limitations, deductibles, and exclusions in the hO-2 homeowners form. The personal property owner must be an occupant of the premises. Under the hO-2, the owner of the property must be an occupant.

11. C The hO-6 covers the condominium unit owner’s exposure for specific improvements to or structural parts of the building or premises.

12. D There is a condominium association consisting of all unit owners or tenants that has a “Condominium Declaration,” setting forth the provisions and rights of ownership and the insurance responsibility of each party. This document is extremely important in determining the necessary level of insurance needed by the unit owner.

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Review Questions Answer KeyChapter 51. B Debris removal pays for the reasonable cost to remove debris or fallen trees caused by a covered

loss with a limit per loss of $1,000 total and $500 per tree. The tree must have damaged a covered structure or blocked a driveway or a ramp or other fixture designed for the handicapped.

2. A Damage to trees, plants, shrubs and lawns is limited to the perils of fire, lightning, explosion, riot or civil commotion, aircraft, non-owned vehicles, vandalism and malicious mischief, and theft. Note that the perils of wind, hail, and weight of ice, snow, or sleet are not covered perils. An additional amount of insurance of 5% of the dwelling amount with a limit of $500 for no more than one tree, shrub, or plant applies under the homeowners forms.

3. A This coverage provides protection against theft or unauthorized use of the insured’s electronic fund transfer card or access device, credit cards, check altered or forged by others, or acceptance in good faith of counterfeit money. The coverage will pay up to $500 additional insurance.

4. B Collapse, the abrupt, falling down or caving in of a building or any part of a building with the result that the building cannot be occupied for its intended use, is covered if the direct physical loss was caused by any one of the Coverage C perils, hidden decay, hidden damage by insect or vermin, weight of contents, equipment, animals, or people, weight of rain collected on a roof, or use of defective material or methods of construction, remodeling, or renovation during the construction, remodeling, or renovation.

5. D “water” damage also means flood, surface water, tsunami, tides, overflow of any body of water, or spray from any of these whether or not driven by wind or storm surge water that backs up through sewers, drains or sumps. Direct loss by fire, explosion or theft resulting from earth movement is covered.

6 B If there is an ensuing fire after a nuclear reaction, the damage caused by the fire is a covered loss.7. D The insurer has a duty to pay a loss unless the insured fails to notify the police if a theft loss occurred.8. D If the amount is at least 80%, the amount paid will be the least of 1) the limit of liability, 2) the

replacement cost of that part of the building damaged with material of like kind and quality, or 3) the amount actually spent to repair the damaged building.

9. A If the two appraisers can’t agree, they will choose an umpire who will make the final decision. If the appraisers can’t agree on the umpire, a judge in the court of record will rule. Each party will pay for its own appraiser and equally share the cost of the umpire.

10. D This endorsement provides limited coverage for water or water-borne material that backs up through sewers or drains, overflow from a foundation tile drain system, or water that overflows from within a sump or sump pump. Common limits are $5,000 with a $500 deductible.

11. C The Increased Limit—Other Structures endorsement will provide an additional amount of coverage for a described structure, like a detached garage, valued more than the Coverage B amount.

12. D The insured will receive the smallest of 1) replacement cost at the time of the loss; 2) full cost to repair; 3) Coverage C limit; 4) special limits, if applicable; or 5) limit that applies to any item separately described.

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Review Questions Answer KeyChapter 61. B Under the Section II—Additional Coverage for Claim Expenses, the insured’s reasonable expenses

incurred at the insurer’s request for assisting in the investigation or defense of a claim, including loss of earnings up to $250 per day, will be paid by the insurer.

2. D This “Good Neighbor Coverage” pays for minor property damage claims without a need to prove the insured’s negligence other than that the loss was caused by an insured. The insurer will pay, at replacement cost, up to $1,000 per occurrence.

3. C There are limitations to the Damage to Property of Others coverage. For example, intentional acts of an insured 13 years of age or older are typically excluded.

4. D Exceptions to the Motor Vehicle Liability exclusion also include a motor vehicle in dead storage on an insured location, used solely to service the residence, non-owned vehicles such as a toy vehicle for children under age 7, or an owned motorized golf cart within the boundaries of a golfing facility or a private residential community.

5. A Watercraft liability, which is normally excluded, does cover watercraft that is stored, a sailboat with or without auxiliary power less than 26 feet or non-owned over 26 feet, an inboard or inboard-outdrive motor boat up to 50hp or a non-owned inboard or inboard-outdrive motor boat over 50hp, and a non-owned outboard over 25hp.

6 C An insured under the age of 21 involved in a part-time or occasional self-employed business with no employees is covered.

7. C The insured should avoid voluntarily pay, assume obligations or incur expenses other than first aid. The insured should also give written notice of a claim including the time, place, witnesses, claimants, and circumstances of the occurrence.

8. A Under the Liberalization Clause, if the insurer liberalizes the coverage under the issued edition of the policy during the policy period or within 60 days prior and if that liberalization does not cost an additional premium, the policy automatically has the more liberal coverage.

9. B Various professional services are covered for liability arising out of incidental business activities other than a business of which the insured is the sole owner or a partner. Some of the more common professional classifications include teachers (e.g. music or dance instruction), clerical office employees, salespeople, messengers, beauticians, and other home-related professional services.

10. C The Home-based Business endorsement provides extensive coverage for both business property and liability for home businesses, including those owned by the named insured, a partnership, joint venture, or organization comprised of the named insured and resident relatives. Also covered is business property, property of others in the insured’s care due to the business, and business property leased by the insured under a business contractual agreement, valuable papers, records, and accounts receivables, time element coverages such as business income, extended business income, extra expense, and loss of business income due to civil authority.

11. D The Umbrella liability coverage is excess personal liability and provides higher limits and broader liability coverage when the underlying or primary coverage is not adequate, has been exhausted, or is excess over the underlying or primary coverages. Insurers offer Umbrella policies with coverages from $1,000,000 up to as much as $5,000,000.

12. B The Umbrella policy also provides coverage for libel, invasion of privacy, false arrest, and wrongful eviction or entry that would be excluded in a standard automobile or homeowners policy.

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Review Questions Answer KeyChapter 71. C CLUE, the Comprehensive Loss Underwriting Exchange, is a database that contains an estimated

40,000,000 claim records on houses in all 50 states and covers everything from water damage to slip and fall claims.

2. D Insurers point out that credit scoring provides an applicant’s bill-paying history which correlates with the tendency to file claims.

3. C The largest of the residual insurance pools, known as the FAIr Plan (Fair Access to Insurance requirements) was created in response to the increase of insurance costs and short supply of coverage in the homeowners market.

4. A In addition to keeping the records and receipts, the insured must also prepare an inventory or documentation of damaged property, and retain the property for the adjuster to inspect, promptly fill out and return the necessary claim forms, and work with the adjuster to complete and finalize the loss settlement.

5. B Once the insured contacts the claim department and a claim is opened, the adjuster will be assigned to investigate, negotiate, and settle the claim. The insurance policy is based on principles of utmost good faith, and the adjuster’s conduct, work ethic, and specific claims handling activities must support those principles.

6 B Independent adjusters are licensed adjusters who are not directly employed by an insurer but instead represent insurers. Independent adjusters can be self-employed or work for independent claims organizations.

7. C Public adjusters represent the policyholder, not the insurer, to protect the insured’s interest. The public adjuster prepares the claim and negotiates the settlement with the staff or independent adjuster.

8. A In handling a claim, the independent claims adjuster will also investigate the claim, use investigation tools such as recorded statements, police reports, and medical or autopsy reports, document the claim file with ongoing details of the claim handling, evaluate the claim to determine liability, negotiate the final settlement, and settle the claim and effectively communicate the results.

9. D When a loss occurs, the ACV is the replacement cost of the property minus the depreciation. The depreciation is 5% times 5 (years) or 25%. Today’s replacement value is $20,000 minus 25% depreciation, or $5,000, is $15,000.

10. D The agreed value is agreed upon by the insured and the insurer at the policy inception. The value is usually determined by an expert appraisal and the agreed value must be updated annually.

11. A A valued policy is the value established at the policy inception because the value might not easily be determined after a loss and the full value will be paid in the event of a loss. Actual cash value or replacement value is not considered.

12. B Subrogation means the transfer of the insured’s rights of recovery from another party to the insurer. It is based on the concept of fairness – the responsible party should pay. If the insurer makes payment under the policy, the insurer will have the right to recover such payment from any liable party who is not an insured under the policy.

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